April 25, 2017
Kick off years of your home loan and benefit from tax savings with an Offset Account
What is an Offset account:
Simply put, it's a nifty little bank account that can be linked to your mortgage account, allowing you to "offset" your mortgage loan balance by the amount in your offset account. This allows you to save the amount you would have paid on interest, with the lower balance.
Still with me? Here's an example, If you have an $800,000 mortgage on a variable rate and you have $100,000 in your linked offset account, This $100,000 can offset your mortgage by $100,000, so instead of paying interest on $800,000, you will only be paying interest on $700,000. Effectively, this could reduce the amount of interest charged on the life of the loan.
If you have a principal and interest loan, your repayments won't change, rather it will re-allocate the interest portion of your loan to the principal portion. So you will usually be paying of your loan years earlier.
If you have an interest only loan it will reduce your monthly payments because it is reducing the amount of interest charged.
The Tax Benefits
The amount of money you will be save by paying smaller interest payments, are usually greater than the savings generated from a standard savings account. In addition, you will be taxed on the interest earned from a savings account, however you will not be taxed on the interest (not paid) for your loan.
Things to consider:
- Potentially higher fees - Often some banks may charge you fees or a higher interest rate to enjoy the flexibility. So shop around til lthe numbers make sense....(but that's why we are here so call or email and we can help)
- Savings vs Offset account - If you know your expected balance for your offset account, you can use our home loan calculators to find out exactly how much money you will save. In effect, if your variable interest rate is higher than the savings interest rate, its a good idea to use the offset account.
- Is it right for you - Finally, are you disciplined? If yes, you can use the offset as your regular transactional account. (Eg. Wages, taxes paid into the account and bill payments deducted) This will allow for maximum benefits since it will always have your highest balance of funds available. The main drawback of this however, is that you will need to constantly manage your balance to avoid overspending.
- Offset account as main account - If you are not too financially disciplined (like about 80% of us out there, me included) you should keep your linked offset account in isolation and only use it for savings and not withdrawals. Don't fret, its always available to you if you find yourself in a pickle.
- Redraw vs Offset Account - If you are rolling in the cash and don't think you will need immediate (less than 2 days) access to the funds, then skip the offset account and just pay off your mortgage, are rely on a redraw facility instead when you need it. Most banks will not charge you a redraw fee