What is an offset account?
An offset account is a type of bank account that is linked to your home loan and can help you reduce the amount of interest you pay on your mortgage. The balance of the offset account is deducted from the principal of your home loan when calculating the interest charges, so you only pay interest on the difference between the two amounts. For example, if you have a home loan of $300,000 and $50,000 in your offset account, you will only pay interest on $250,000 ($300,000 - $50,000).
An offset account works like a regular transaction account, meaning you can deposit and withdraw money from it anytime. You can also use it for your everyday expenses, such as paying bills, shopping or transferring funds. Some offset accounts may also come with a debit card that you can use to access your money.
There are several benefits of having an offset account, such as:
- Saving money on interest: By reducing the amount of interest you pay on your home loan, you can save thousands of dollars over the life of your loan and potentially pay off your mortgage faster.
- Saving tax: Unlike a savings account, where the interest you earn is taxable income, an offset account does not generate any interest income for you. Therefore, you do not have to pay any tax on the money you save on interest by having an offset account.
- Having flexibility: An offset account gives you easy access to your money whenever you need it, without affecting your home loan repayments. You can also use it to save for other goals, such as a holiday or a renovation.
However, there are also some things to consider before opening an offset account, such as:
- Eligibility: Not all home loans offer an offset account option. You may need to check with your lender if your home loan is compatible with an offset account and what are the terms and conditions.
- Fees: Some offset accounts may charge monthly or annual fees that could reduce the benefits of having an offset account. You may need to compare different offset accounts and their fees to find the best one for you.
- Balance: The more money you have in your offset account, the more interest you save on your home loan. However, if your offset account balance is low or fluctuates frequently, you may not save much on interest and may be better off with a different type of account.
To illustrate how an offset account works, let's look at an example:
Suppose you have a home loan of $300,000 with an interest rate of 3% per annum and a repayment term of 25 years. You also have an offset account with a balance of $50,000.
Without an offset account, your monthly repayment would be $1,420.25 and your total interest paid over 25 years would be $126,075.
With an offset account, your monthly repayment would still be $1,420.25 but your total interest paid over 25 years would be $103,575. That's a saving of $22,500 in interest!
As you can see, having an offset account can make a big difference in how much interest you pay on your home loan and how quickly you can pay it off.
An offset account is a useful tool for managing your home loan and saving money on interest. However, it may not suit everyone's needs and circumstances. You may want to consult a financial adviser or a mortgage broker before deciding if an offset account is right for you.
