Offset Accounts Explained: How They Work and Who Benefits

What is an Offset Account?

An offset account is a transaction account linked to your home loan that can help reduce the amount of interest you pay over time. The balance in this account is offset against your mortgage balance, which means you only pay interest on the difference between the two amounts.

For example, if your mortgage balance is $400,000 and you have $50,000 in your offset account, you will only be charged interest on $350,000. This setup can lead to significant savings on interest payments and can help you pay off your mortgage faster.

How Does an Offset Account Work?

Basic Mechanics

• **Linked Accounts**: An offset account is typically linked to a variable rate home loan. All deposits made into the offset account reduce the amount of interest charged on the home loan.
• **Interest Calculation**: The interest on your mortgage is calculated daily, and the offset account balance is taken into account daily as well. This means that even a small amount in your offset account can reduce your interest payments.
• **Types of Offset Accounts**: There are generally two types of offset accounts:
• **100% Offset**: Every dollar in this account offsets the mortgage balance dollar for dollar.
• **Partial Offset**: Only a portion of the funds in this account offsets the mortgage balance. Generally, these accounts offer lower fees or interest rates.

Example Calculation

To illustrate how an offset account can save you money:

• Mortgage amount: $400,000
• Offset account balance: $50,000
• Mortgage interest rate: 4%

Without an offset account, your annual interest would be approximately $16,000. With the $50,000 offset, your interest is calculated on $350,000, reducing your annual interest to about $14,000. This results in a saving of $2,000 per year.

Who Benefits from an Offset Account?

Homeowners

For homeowners with a variable rate mortgage, an offset account can be an effective way to manage interest costs. If you’re planning to keep a significant amount of savings, it may be worth considering an offset account instead of a standard savings account.

Investors

Property investors can also benefit from offset accounts. By keeping rental income in the offset account, investors can reduce the interest on their investment loans, thereby maximising their cash flow and enhancing their investment strategy.

Savvy Savers

If you have savings that you intend to use for a future purchase, placing those funds in an offset account could provide a dual benefit: reducing interest on your mortgage while keeping your savings accessible.

Practical Tips for Using an Offset Account

1. Maximise Your Balance: Try to maintain a higher balance in your offset account. Every dollar counts when it comes to reducing your mortgage interest.

2. Consider Your Spending: Use your offset account as your primary transaction account. Direct your salary and other incoming funds into this account to maximise the offset effect.

3. Regular Reviews: Review your mortgage and offset account regularly with a financial advisor to ensure that you’re getting the best possible deal.

4. Understand Fees: Be aware of any fees associated with the offset account. Sometimes, the benefits of reduced interest can be offset by account fees, so it's important to do your homework.

Frequently Asked Question

Can I have more than one offset account?

Yes, many lenders allow you to have multiple offset accounts linked to your home loan. This can be beneficial for budgeting and managing different income streams. However, keep in mind that the total balance across all offset accounts will be combined to calculate the interest offset.

Conclusion

Offset accounts can be a powerful financial tool for reducing mortgage interest payments and accelerating the repayment of your loan. By understanding how they work and the benefits they offer, you can make more informed decisions about your mortgage strategy.

If you would like personalised advice tailored to your specific circumstances, contact Timothy Yang at Northmark Finance. Timothy can help you navigate your options and determine if an offset account is right for you.

Disclaimer: This blog post is general information only and should not be considered financial advice. Please consult with a qualified financial advisor for personalised guidance based on your individual situation.