If you don’t want to feel stuck with a mortgage any longer than necessary, there are several ways to reduce the interest you’ll pay over time and shorten the life of your home loan. One of the ways to do this is to set up a home loan clearing account.
In this article, we’ll explain what a home loan clearing account is and how it works. Keep reading to find out more!
What is a Home Loan Offsetting Account?
A home loan offset account is a type of account you can use to reduce the interest on your loan. It is used instead of a regular bank account, but works the same way. The only difference is that the account is specifically tied to your home loan.
When you use an offset account, you only pay interest on your home loan balance minus the offset account balance. In effect, this means that the more money you have in your clearing account, the less interest you will pay.
How does a home loan clearing account work?
Home loan clearing accounts must be created and linked to your home loan. Once the account is created, your funds can be deposited into it and it will function as a bank account. You will still be able to make direct payments using the account and you will receive a debit card linked to the account itself.
How does this reduce your interest rates and the term of your loan? The details depend on your mortgage lender, but the operation of the account is the same from one institution to another.
Consider a $250,000 home loan.
When you use a home loan offset account with 100% offset, every amount of money in the account offsets the interest amount of the home loan. Therefore, an account with $50,000 offsets the interest amount on the home loan to $200,000.
Instead of paying interest on a $250,000 loan, you pay it on a $200,000 loan. It makes a big difference in the long run.
The best part about it, however, is that the money can always be accessed at any time. You are not limited to how the money can be used. Anything in the account will always offset the interest paid on the loan.
Treating a home loan clearing account like a savings account
One of the best strategies you can use with a mortgage clearing account is to treat it like a savings account.
Over time, the amount of money in the account will continue to grow and offset the amount of interest paid on your home loan. You can still access the money, just like you would with a traditional savings account.
Want to learn more about the benefits of having a loan clearing account? Find a Total Mortgage branch near you and speak with a Mortgage Advisor today to discuss your options.
Understand the different types of clearing accounts
When looking for a clearing account, you will come across two different options:
- Accounts Cleared 100%: As the name suggests, 100% of the account balance is applied to the home loan offset amount.
- Partial Clearing Accounts: Partial offset accounts apply a partial amount from the account to offset the home loan. For example, if you have a 75% clearing account, a balance of $10,000 translates to a home loan clearing of $7,500.
How to Use a Home Loan Clearing Account
If you’re considering a home loan offset account, there are a number of strategies you can use. Here is a list of options that can help you determine how to use your clearing account in the best possible way.
Open an account with a specified amount
Rather than opening a clearing account that you will actively use, open one that will only ever hold a specified amount. When you take the time to calculate how much interest you’ll pay, you can also figure out how much you want to save. Then the account can be replenished with the compensation amount which can help you achieve this.
Replace your bank accounts entirely with a clearing account
A great way to make sure you keep money in your mortgage clearing account is to use it instead of your standard bank account. When you don’t have to keep money in your account, chances are you won’t. This may result in too low a balance in your clearing account to make a difference.
As long as you are stable in your finances, you can effectively replace your bank accounts by using a clearing account from your home lender. Your salary can be deposited directly into it, allowing you to keep money in the account and use it regularly.
Using credit cards in combination with a clearing account
In most cases, credit cards will have a lower interest rate than a mortgage. If you want, you can replace your bank account with a clearing account and then use credit cards for everyday purchases. This allows you to maintain a larger balance in your clearing account, which significantly lowers your overall interest.
Like all of the other strategies listed here, this is going to require discipline. This works because the interest on your home loan is going to be compounded daily. When you maintain a larger balance in your clearing account and use credit cards for purchases, you reduce interest more effectively.
Explore Total Mortgage’s Mortgage Programs
A home loan offsetting account is an account linked to your mortgage, which will offset bank amounts for your monthly loan repayments. It’s a great way to keep more money in your pocket and pay off your loan faster.
If you’re looking for a mortgage, be sure to explore Total Mortgage’s loan program options when you’re ready to buy a home. If you have any questions about your mortgage options, schedule an appointment with one of our mortgage experts.
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