A mortgage offset account is a combination of a transaction account or a savings account used in conjunction with your home loan. The balance in the account is offset on a daily basis against the loan balance. The lender acknowledges that you have paid extra savings to your loan, with the lender charging you less in interests because they are not charging you interest on the full remaining balance. The actual offset account can be associated with your variable rate loan or a fixed rate loan.
Typically, the home owner will not earn any interest in their offset account. The balance in this account is to displace the interest charges to your linked home loan. In these scenarios, it is best to be illustrative to showcase how offset accounts can be connected with your home loan and how they can help offset interest rates.
For example, if you had a loan for $450,000 and you have already repaid $100,000 of that balance, you would be paying interest on the remaining $350,000. However, if you have an offset account to pay that $100,000, you will only be paying the interest on $250,000 of the remaining balance. The more money that you have in your mortgage offset accounts, the less interest you will pay during the life of your home loan. Many homeowners may prefer earning interest from a savings account over saving interest on the mortgage. However, saving interest on your mortgage is better for these reasons:
The interest rate is actually higher. The interest rate charged on the loan is going to be greater than the rate the bank pays out on a savings account. Simply put, a mortgage offset account will save you more money than a savings account will ever earn you.
Offset mortgages mitigate risk. Mortgage offset accounts and a savings account are categorised as cash accounts. Utilising an offset account will provide room for you to increase returns without increasing your risks.
You will save on taxes. Interest earned on a savings account will be taxed. There is no tax on the interest you will save on your mortgage offset account.
Using an Offset Account With Your Mortgage Effectively
Direct deposit into your offset account. You can connect your debit card to your offset account and use it as your transaction account, then tell your employer to make direct deposits into your offset account. Interest is accumulated on a daily basis on the offset account, so even if the balance changes on a regular basis, you’ll still be able to save on interest.
Offset account and credit card payments. The more money that is in your offset account, the more you will save in the long run as long as it is relatively untouched. If you are disciplined, you can use a credit card to defer expenses by strategically using their interest-free payment period. It is important that the balance is paid in full when due since you do not want to incur interest charges on the credit card.
Savings go directly into your offset account. Extra savings will work harder for you in a offset account. The interest rate on your home loan will most likely be higher than the rate on your savings account, allowing you to pay income tax on the interest earned and allocating additional funds into the offset account.