Looking for ways to pay off your mortgage in record time? Whether you’re a seasoned investor or buying your first home, an offset account can help you reduce interest payments, save on tax and pay your mortgage off years ahead of schedule.
What is an offset account?
With an offset account (also called an offset loan, interest offset account, mortgage offset account or offset home loan) the borrower takes out a home loan and opens a linked savings or transaction account. The balance in the savings account is then ‘offset’ daily against the balance of the home loan.
How an offset account works
With an offset account, instead of receiving interest on your savings account each month, the interest payable on your home loan is calculated on the home loan account balance less the balance in the linked transaction account, effectively reducing the amount of interest you pay over the life of the loan.
For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your home loan is calculated on $380,000 instead of $400,000.
While your repayments remain the same, you’re paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan.
For home owners, another potential benefit is that the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, which means you may not have to pay tax on any interest earned on your savings. You should seek advice from an accountant on the tax implications of an offset account.
Getting maximum benefit from an offset account
Because your home loan interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan. You can still access the money in your offset account online or with an ATM card, however because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible.
Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you’re not a disciplined spender you may end up incurring interest charges on your credit card and cancelling out the savings benefit of the offset account.
What you need to know about offset accounts
- An offset account is identical to any other savings account with a bank card and online access, so you can withdraw your money at any time
- In most cases the offset is tax free (but do consult your tax accountant)
- Most offset accounts are offered with variable rate loans; however, some lenders offer offset accounts on fixed rate loans, too.
The upshot? Many borrowers could benefit from having an offset account, particularly if you have substantial savings. It’s worth talking to one of our expert brokers to find out more about the best option for your circumstances to help you pay off your mortgage as soon as possible. You can book a free consult by calling (08) 9367 4222, email us or fill in the contact form on this page.