If you’re new to the home loan world, chances are you’ve had a lot of terms thrown at you. Come across offset accounts yet? To many first home buyers, this can be a confusing concept at first. So, let’s look at offset accounts and whether you should set one up when getting your home loan.
Mortgage offset accounts allow you to use your savings and income to reduce the amount of interest you pay on your mortgage, without actually locking away your money. An offset account is a separate bank account to your home loan or a loan split, but it is linked, from the same provider and opened at the same time. The balance in your offset account is ‘offset’ from your loan balance when calculating interest, your total loan amount.
Let’s look at an example… say you have a $300,000 home loan, and you have $10,000 in your offset account. Interest is calculated on the balance i.e. $290,000 and so the money in your offset account saves you interest without you having to physically deposit it into your loan account.
Another benefit of using an offset account is the potential tax savings. As you don’t actually receive any interest payments on your savings, because it is sitting in your home loan offset account, you don’t need to pay tax on earning interest. You therefore get the full, tax-free benefit of the savings interest in reducing your home loan debt. This often operates best when your mortgage offset account is used as your primary bank account – for savings, lump sum payments and salary payments.
Mortgage offsets can be very effective if used correctly, but bear in mind that some lenders may charge additional monthly fees, for the privilege of this feature. It’s important to do your sums, as it might not suit your circumstances, especially if you have a large mortgage and little savings to put in the offset account.