An offset account is a savings account linked to a loan account. No interest is paid to the offset account but instead the balance of your offset account is deducted from your loan account before the interest on your home loan is calculated. Therefore less interest is charged to your loan.
For example, a borrower with a $300,000 mortgage and $10,000 in an offset account will only be charged interest on $290,000 and not $300,000. Some products do not offer 100% offset, while others may require a minimum balance in the account before the offset applies.
- Savings interest is taxable, but because your offset account balance is used instead to reduce your loan interest, no tax is payable, so you are effectively reducing your tax bill.
- The interest rate on your offset account is the same as that applied to your loan account. This is a great rate and is much higher than what you could earn on most savings accounts. The interest rate moves with your loan account rate ensuring you get maximum benefit from every dollar in your offset account.
- You may have higher monthly fees attached to the account.
- You may need a minimum balance in the account to benefit.
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