Offset account – a better way to manage a mortgage?
If you want to repay your mortgage quickly and still have easy access to your additional repayments, an offset account may be worth using.
What is an offset account?
An offset account is a transaction account that is linked to your home loan and the money you deposit in it offsets the loan balance before interest is calculated. For example, if you owe $400,000 on your home loan and have accumulated $50,000 in an offset account, interest will be calculated on $350,000.
Benefits over regular savings accounts
If you hold your surplus cash in an offset account you can save interest at home loan rates, and no tax is payable on the interest savings. This is effectively like ‘earning’ the home loan interest rate tax-free.
Alternatively, you could hold your surplus cash in a regular savings account but the interest rate you earn is usually much lower than what you pay on your home loan. Plus, every dollar in interest you earn is taxable at your marginal rate, which could be up to 49% (for a top income earner including Medicare Levy and the Temporary Budget Repair Levy).
Benefits over direct loan repayments
When you make additional repayments directly into the loan you can achieve similar benefits to having an offset account. However, limits often apply to the frequency and amount of withdrawals you can make and withdrawal fees are usually charged. With offset accounts, you typically have ready access to the money via an ATM, cheque book and internet, and withdrawal fees are generally not charged.
The best of both worlds
You may even want to have your salary paid directly into an offset account and withdraw money as needed to meet your living expenses. This can enable you to make the interest savings available with direct loan repayments and have easy access to your money.
|What interest rate is earned/saved?||Would interest earned/saved be taxable?||Would you have ready access to the money?|
|Cash account||Deposit rates||Yes||Yes|
|Direct loan repayment||Home loan rates||No||No|
|Offset account||Home loan rates||No||Yes|
Remember to chat to your financial institution about the features of their particular offset account including any fees or restrictions. They might even be able to offer you multiple offset accounts to help you manage your finances better.