Offset accounts – put your spare cash to work

An offset account is a useful tool to get ahead with your home loan.

An offset account is a savings or transaction account linked to your home loan. When the monthly interest charge on your loan is calculated, the balance of the linked account is deducted from, or ‘offset’ against, the balance of your home loan.

Valuable savings on interest

Let’s see how an offset account works in practice. We’ll say Sue has a home loan of $300,000, with $20,000 in her linked account. Instead of being charged interest on a loan of $300,000, the interest will be based on a loan value of $280,000 ($300,000 less $20,000).

Sue’s regular loan repayment won’t change, but the reduced interest cost means more of her monthly payment goes towards paying off the loan rather than paying interest. This in turn reduces the following month’s interest charge, helping Sue fast-track her way to becoming mortgage-free.

If Sue held the same $20,000 invested in a separate savings account, she would earn interest on her money, though usually at a lower rate than her home loan (and remember, interest income is fully taxable). So by using an offset account, Sue is likely saving more in interest than she would earn with separate savings. As an added plus, an offset account still provides access to your money at call.

Is an offset right for you?

For many home owners, an offset account is a smart way to make their spare cash work harder. However there can be pitfalls. In particular, it pays to look for 100% offset where the full value of the linked account is offset against your home loan.

Call me today to discover if an offset account is the right strategy for you. I can also put you in touch with your Mortgage Choice home loan expert, who can discuss the loan structure that is best suited to your needs.