A mortgage offset account is a great way of using your savings to reduce the amount of interest you will pay on your home loan.
If you are unfamiliar with an off-set account, it is essentially a transaction account that is linked to your home loan, where the credit balance of the transaction account is “offset” against the mortgage balance. The result is a reduction of amount of interest payable to your loan.
This is how it works. If you have a mortgage of around $500,000 with an interest rate of 5.6 per cent, you then get an offset account with a balance of $20,000.
Instead of paying interest on the full balance of the mortgage, you are only charged interest on the first $480,000 ($500,000 less $20,000 in your offset account) and no further interest is paid on top of that $20,000. Essentially, an offset account enables you to reduce the payable interest on your home loan, as well as reducing the loan term at the same time.
In addition to reducing the interest on your mortgage, there is an additional tax benefit. The Australian Taxation Office does not recognise the $20,000 in the offset account as taxable income, because you have not received interest on this money like you would with a transaction account, so the money remains tax-free.
For many people, an offset account is a great strategy to reduce the interest on their home loan. But, before you take on a mortgage with an offset facility, understand that there are some pitfalls to offset accounts.
Firstly, off-set accounts are normally only available on mortgages with a higher variable interest rate.
Secondly, those who benefit the most from a mortgage offset account are those people who tend to have a large pool of savings in their bank account. The reason is the more money you have in your offset facility, the more interest you save. So those with $30,000 in an offset will save a greater amount of interest on their home loan compared to those with only $5,000.
If you tend to only have a couple of thousand dollars stashed in your savings at any one time, it might be a better option for you to consider a basic home loan without an offset facility, but with a lower rate of interest. You would then store any spare cash you may own in a high-interest transaction account.
That said, everybody’s circumstances are different and it is recommended that you discuss your options with a mortgage broker, such as Mortgage Choice. They can help you find the best home loan to suit your circumstances.