Useful Tips

What is an Offset Account?

Every lender has their own terms and conditions, and this is intended only as a general guide to understanding this topic. Contact me to discuss your individual circumstances.

Definition
An offset account is simply a bank transaction or savings account that’s attached to your home or investment loan.
It operates like a regular transaction account, and your loan interest is calculated on your daily loan balance less any balance in your offset account. Your money remains in the offset account and can be easily accessed when needed.

Benefits
Your income starts saving you loan interest the minute it lands in your offset account.
You save interest at home loan rates rather than earning interest at savings account rates.
You don’t pay income tax on the interest that you save.
If you have a 100% offset you save interest on every dollar in the offset account.
While your income and savings work to reduce your loan, your money is still easily accessible should you require cash quickly.
With less interest being charged on your loan, each loan repayment you make will pay off more principal, which means paying less interest, which means paying more principle – paying off your loan much quicker!
If you have a home, but it will become an investment property in future, an offset account may enable you to maintain a maximum balance for your future
tax-deductible debt. Speak to your accountant for advice specific to your situation.

Disadvantages
All offset accounts incur ongoing bank fees.
There may be a minimum balance to be retained in order for the offset effect to be calculated (e.g. not 100% offset).
A cheap simple variable rate loan that lets you make additional repayments may be all you need.
You may incur charges if you decide to refinance your current home loan to include an offset account.

Things to consider
Offset accounts are particularly effective for borrowers with higher disposable incomes since the larger amount of excess funds placed into a mortgage have a greater impact on reducing the loan’s principal.
If your only mortgage is an investment loan and you have excess savings or cash, an offset account and interest only loan could be a tax effective structure.