Mortgage Offset Account

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mortgage offset account

An offset home loan, interest offset account, offset account and mortgage offset account are all similar terms. A mortgage offset account is basically one of the strongest ways of paying off a home loan and for saving thousands of dollars over the lifetime of a loan. It is usually a fully transaction account which can be linked to your investment or home loan. The credit balance of this account is then offset on a regular basis against the outstanding loan balance, decreasing the interest that a person has to pay on his or her loan.

What are the Advantages of having an Offset Account?

There are several benefits of having an offset account and it is essential to know the correct ways of using this wonderful tool to gain the benefits. The benefits will depend on your personal circumstances and I have a few examples below to show what advantages you can gain.

Benefits for home owners

  • If you were to save in a separate savings account, and earn interest, you would be taxed at your marginal tax rate on the interest earned. E.g. If you had a balance of $20,000 and was earning 5% interest, you would have earnt $1,000 in interest. You would then pay tax on this and could lose close to half of this in tax. As an offset account you don’t earn interest but save interest so no tax is paid. So not only does it save you interest but it can help you pay your home loan off years earlier.
  • Most offset accounts work as a full function transaction account, allowing flexibility to withdraw and deposit your salary from the account, pay bills, receive and receive any other income like rent on a regular basis.

Benefits for Investors

  • As an investor, if you use your surplus funds to directly pay off your investment loan, but then decide down the track to withdraw the funds for personal use, the loan will no longer be fully tax deductible. For example, if you have a $400,000 investment loan and you use $100,000 surplus funds to pay off the loan. If at a later date you withdraw those funds for personal use, only $300,000 of the loan would still be tax deductible. If however you placed the entire $100,000 into an offset account, then upon withdrawal the full amount of the loan would maintain it’s tax deductible status.

How offset accounts can be great for First Home Buyers

  • As a first home buyer your First home is usually only a stepping stone to another nicer larger home and one you will likely out grow in the future. Most buy their first home with the intention to either sell it, upgrade, or turn it into an investment property.
  • If you have purchased a home and you intend you use it as an investment property in the future a mortgage offset account can really have some significant benefits. If your initial loan was interest only and you place all surplus cash into your offset account, you will continue to pay less interest just as you would on a standard principal and interest loan. However when it comes time to potentially upgrade, and move to a new property you can simply draw your saved money out of your offset account to use for your deposit. The great news is that your initial loan would now be an investment property loan will be fully tax deductible. This could mean thousands of dollars in savings into the future. On the other hand, had you paid principal and interest and started with a $400,000 loan and paid it down to $300,000, going forward only $300,000 would be tax deductible. That means that you would miss out on a tax deduction of $5,000 every year into the future. That could be close to $2500 in tax savings every year depending on your marginal tax rate.

What are the Disadvantages of having an Offset Account?

Although an offset account is a great way of paying off your home loan, and maintaining the tax deductibility of interest there are some disadvantages.​

Most offset accounts are only offered with standard variable rate home loans. If you have a standard variable rate home loan you will generally have two options. Pay a package fee (usually close to $400) and receive an interest rate discount of between 0.7% to 1% off the standard variable rate. Or choose to not pay the package fee and pay the higher rate. This is compared to taking a basic variable rate home loan, without the bells and whistles like an offset account but with either low or no ongoing fees. As a general rule of thumb, if you have a home loan above $250,000 you will generally be better of paying the fee, where small loans under $100,000 fees can make a much bigger difference to the overall cost of a loan.​

As an example, if you have a $250,000 loan and the standard variable loan with the lenders professional package has a 0.2% better rate then the basic loan that amounts to $500. So even if you are paying a package fee of $400, you are still better off. Not forgetting if you do have significant savings you may be saving yourself hundreds if not thousands of dollars into the future by getting the structure right.​

Every scenario is different so it is worthwhile getting professional advice from a quality mortgage broker on your specific circumstances.​

Use of credit card in offset accounts

You can also save interest on your home loan by linking a credit card to the offset account. When you use your credit card for regular purchases during its interest free days instead of using money from your offset account, your saving interest on your home loan. It is smarter to use the banks cash then your own and save yourself the interest. This not only maximizes the cash in your offset account, but also makes your money work harder. However, make sure that you pay off your credit card when it is due. You can avoid paying interest on credit card by using the money available in your offset account for paying your credit card (in full) by the due date.

Warning: I have found that most people do not use a credit card effectively. The use of a credit card for most people takes away any control they have over the spending habits. Money just slips through the fingers and it is too easy to make purchasing decisions. Basically people spend more money on things they don’t need when they are using a credit card The additional spending wipes out any benefit they may have gained in interest and will regularly send them backward. So only consider this option if you know that you can track your spending and are able to keep to a budget.