When choosing your home loan product, it can be well worth your while looking at the option of an offset account.
What is an Offset Account?
Offset accounts are transaction accounts that are linked to your home loan and if used correctly can save you thousands and reduce the lifespan of your loan.
How does an Offset Account Work?
You can basically use an offset account like you would any normal transaction account, using ATMs, online banking and debit card transactions.
The difference is an offset account is linked to your home loan. An offset home loan includes both the regular mortgage and this linked offset account, the balance of which is offset against the balance of the home loan.
Benefits of Using an Offset Account
Save on Interest Payment
While you will not be paid any interest on the money held in an offset account, the reduced amount that has been offset against your mortgage balance means you will pay less interest on your home loan each month.
As time goes on and if interest rates remain the same, your loan repayments remain the same, but the interest component of those repayments is lower and more of the loan principal amount is knocked off.
With this ratio slowly improving each and every month, you can end up saving on interest payments while at the same time getting to the finish line of your mortgage sooner.
Tax Benefits
Offset accounts also have tax benefits in that they don’t receive interest payments on the money held in them. As a result, you will never have to pay tax on any interest earned on savings like you might have to on a traditional saving account.
Types of Offset Accounts
Full Offset Account
You can usually opt for either a full or partial offset account. A full offset account means 100 percent of the balance of the offset account is deducted from the home loan balance when calculating interest.
Partial Offset Account
With a partial offset account, you will only be able to offset a portion of the account balance from the home loan amount.
Maximising the Benefits of Offset Accounts
One key of maintaining offset accounts so the money works for you is ensuring there is enough money held in them each month.
This is because offset accounts do tend to come with higher fees and interest rates and if you let the balance slip too low, the higher interest rate charges could end up being higher than anything you save through the offset feature, and you might have been better off with a more basic home loan with lower rates and fees.
