An offset account is typically a savings or transaction account that is linked to your mortgage account. The primary function of an offset account is to help you reduce the amount of interest you pay on your home loan.
Here’s how it can benefit you:
Benefits of an offset account
Reducing your interest
The balance in the offset account is used to ‘offset’ against your home loan balance. For example, if you have a home loan of $500,000 and $100,000 in your offset account, you will only be charged interest on $400,000.
Accessibility and flexibility
Money in an offset account is usually easily accessible, much like a regular checking or savings account. This means you can deposit and withdraw funds as you normally would as if it is an everyday bank account.
Pay off your loan faster
Because you are reducing the amount of interest you pay, an offset account can also help you pay off your loan faster.
Typically, your home loan monthly repayments remain the same, but with less interest to pay (thanks to the offset account), a larger portion of your repayment goes towards paying down the principal rather than interest.
Tax benefits
An offset account can provide you tax advantages in some setups. For example, say you have $100,000.
In a normal high interest savings account, you may earn 3% per annum (per year) on the $100,000. This will mean that you earned $3,000 at the end of the year in interest. This would get counted as part of your income and get taxed accordingly in the bracket you fall into. However, if you stick that $100,000 in an offset account, and your home loan interest rate is 5% per year. By the end of the year, you would have saved $5,000 in interest. This $5,000 in interest saved would be a net benefit for you as you are not taxed on that $5,000 saving via home loan interest and you technically did not earn any income, you simply didn’t spend $5,000 more on interest.
Fees and costs associated with offset accounts
- Account-keeping fees: Many offset accounts come with monthly or annual account-keeping fees. These fees can vary and might be higher than those for standard savings or transaction accounts.
- Higher interest rates: Sometimes, lenders might charge a slightly higher interest rate on your home loan if you choose to have an offset account. It’s important to calculate whether the interest savings from the offset account outweigh the cost of a potentially higher interest rate.
- Application or setup fees: There might be a one-time fee when you initially set up the offset account, especially if it’s being set up in conjunction with a new home loan.
- Withdrawal fees: While many offset accounts offer easy access to funds, some may charge fees for withdrawals or have limits on the number of free transactions.
- Package fees: Offset accounts are often offered as part of a home loan package, and these packages can come with their own set of annual fees. However, they may also offer additional benefits like discounted home loan rates, credit card fees waivers, or other banking products.
- Minimum balance requirements: Some offset accounts may require a minimum balance to be maintained to get the benefits of the offset feature. Failing to maintain this balance could result in fees or reduced benefits.
- Early termination fees: If you decide to switch lenders / refinance / or close your offset account early, you might be charged a termination fee.
It’s important to read the terms and conditions of the offset account carefully and understand all the fees involved. Compare these costs with the potential savings from reduced interest payments on your home loan. In many cases, the benefits of the interest savings outweigh the costs, but this depends on your individual circumstances, such as the balance you maintain in your offset account and the details of your home loan.
Consulting with a financial advisor or a mortgage broker can help you understand the costs and benefits in the context of your personal financial situation.
