What is a mortgage offset account?

A little trick that can save thousands.

An offset account can be a good way to save interest charges on your mortgage whilst being tax effective.

What is an offset account?

An offset account is a bank account linked to your home loan which you can make regular deposits and withdrawals from. The balance you hold in the offset account is used to reduce the effective loan balance which reduces the amount of interest charged on your home loan.

The higher the balance and the longer the period, the less interest you will pay.

As you are not earning interest income on the account you are not taxed on the benefit of the reduced interest payments.

How does it work?

  • Let’s say you take out a $600,000 home loan.
  • You then deposit $20,000 into your offset account.
  • You’ll now be charged interest on $580,000, instead of the full $600,000.
  • This will happen for as long as the $20,000 stays in your offset account

How much could I save?

Looking at the above example, let’s assume your home loan interest rate was 5% – you will reduce the interest charges by $1,000 per year. It’s like having your money invested at 5%, which is hard to get in the low interest rate environment.

However, if you had invested the $20,000 in a term deposit account at a rate of 1.6% you would have received interest income of just $320. This would then be subject to tax at your marginal tax rate (for most people 34.50%) meaning you are left with a net benefit of only $210.

So in this example, you are $790 p.a. better off.

Over 30 years that adds up!

Keeping money in your offset account can save you thousands of dollars and cut years off your home loan term.

How to use an offset account

Since it is a regular transaction account you can have your pay deposited straight into the offset account and use it as your everyday transaction account. It can also be used to park savings to benefit from the reduced interest charges.

As you are not paying down the actual loan account balance an offset account is a good option for property investors looking to keep the tax deductibility of a loan.

For example, if you had paid $20,000 of the investment loan and later decided to redraw those funds for a family holiday, then that portion of the loan would not be tax deductible.

Whereas if you had the funds in the offset account and withdrew them, there has been no change to the loans purpose or use keeping the tax deductibility at 100% of the balance. Slight difference but a massive impact on your tax affairs.

Before you decide on a mortgage with an offset account, you may like to consider the additional fees or charges for having that feature. It’s worth considering if the interest savings will exceed the monthly or annual fees.

If need assistance or advice we have access to a network of mortgage brokers that can provide further insight.

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