How does an offset account work?
Are you looking for a way to pay off your mortgage sooner?
It doesn’t matter whether you are an experienced investor or buying your very first home, an offset loan can help you reduce interest payments and pay your mortgage off years ahead of schedule.
What is an offset account?
With an offset loan the borrower takes out a home loan and a savings (or transaction account) The important part here is that the borrower LINKS this savings (or transaction account) to the home loan. The link between the two, allows the balance in the savings account (or transaction account) to ‘offset’ daily against the home loan.
How an offset account actually works?
With an offset loan, instead of receiving interest on your savings account each month, the account balance is simply offset against your home loan balance Therefore, when the interest amount is calculated by the lender, it is calculated on a reduced balance, which in turn means a reduced amount of interest.
Lets look at an example of how an offset account works:
If you have $10,000 in your offset account and $500,000 owing on your mortgage, the interest on your home loan is calculated on $490,000 instead of $500,000.
While your repayments remain the same, you’re actually being charged, and thus paying, less interest. This means that you will be paying off more of the principal part of the loan each time you make your regular home loan repayment.
If you can maintain a significant balance in your savings account or transaction account, you can potentially pay off your mortgage years earlier than with another type of loan.
Another potential benefit is that as the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, you may not have to pay tax on any interest earned on your savings. Seek advice from an accountant on the tax implications of an offset account.
How do I get the most benefit from an offset account?
Mortgage interest is calculated daily, so when borrowers get their wages or salaries paid directly into their offset account, they are immediately reducing the interest charged.
Of course, as a transaction account allows you to access your money online, or even via an ATM card, the accessibility to your interest saving vehicle is not restricted as it may be if your savings were sitting IN your home loan account itself.
Interesting facts about an offset account:
- An offset account is identical to any other savings account (or transaction account) with a bank card and online access, so you can withdraw your money at any time. This is different to if you were to put your extra money into your home loan account itself.
- Remember, some loans will NOT let you redraw extra repayments from your home loan so always see your mortgage broker to ensure that, if you want to, that you have access to extra repayments.
While most offset accounts are offered with variable rate loans, we are seeing some lenders offer offset accounts on fixed rate loans too.
It’s worth talking to your broker to find out more about the benefits of an offset account and if it would be beneficial to you, in your individual circumstance.