What is an Offset Account and How Does It Work?

Want to hear three words that could help you slash thousands of dollars off your mortgage?

Mortgage Offset Account.

Otherwise known as an offset savings account, interest offset account or offset home loan.

You’ve perhaps seen it in a list of features included in a mortgage package, but do you know what it is and what it can do for you?

A mortgage offset account is simply a bank account linked to your home loan that allows you to reduce interest payments, save on tax and pay off your mortgage ahead of schedule.

The balance of this account is ‘offset’ daily against your loan balance, meaning the lender views the money as extra savings paid towards your mortgage. While your repayments will remain the same, you’ll be paying less on interest and paying more off the principal. Offset accounts can be linked to both variable and fixed rate loans depending on your lender.

So how does it work?

Normally, if you had a loan worth $250,000 and had repaid $50,000, then you would be paying off the principal as well as the interest on the remaining $200,000. However, if you had a linked offset account with a balance of $40,000, you would only be paying interest on $160,000 of the remaining balance.

Are there types of offset accounts?

There are two types of offset accounts to be aware off: a 100% offset account and a partial offset account. A 100% offset account refers to the full balance of the account applied against your loan balance. Whereas, as the name suggests, a partial offset account applies a partial amount of the balance against the interest payable on your home loan. Typically, a 100% offset account is more effective at saving money on interest than a partial interest account, as the full amount is counted.

What are some of the beneficial features of an offset account?

•    Size of deposit: Depending on the size of your savings within the account, you may be able to cut years off your home loan and pay far less in interest over the life of the loan. Every cent counts towards paying less interest.

•    Easy to manage: If you have your salary deposited directly into your offset account, you can automatically save money on your monthly interest repayments. By doing this, you can immediately reduce the interest payable on the loan. You can still access your money online or with an ATM card. However, due to the nature of the account, you may want to keep the figure as high as possible.

•    Tax benefits: The Australian Taxation Office does not consider an offset account to be interest-earning. This means that any benefit on reduced interest on your home loan is tax free.

•    Flexibility: If an emergency arises and you’re strapped for cash, the money is readily available to you. You won’t need to waste money on redraw fees, and can access your savings with ease in the event of a crisis.

To determine whether you will benefit the most from an offset account, it’s best to speak with your mortgage broker. They’ll be able to offer advice to guide you through the process and learn the best options to suit your circumstances.

At Select, we offer no-obligation, quality and free advice to help you reach your financial goals. Give us a call on (08) 9417 3399 to talk with one of our brokers.