If you have a mortgage then the chances are you know what it feels like to be chained to your bank.
But, did you know that an offset account can save you interest on your home and can help you pay it off sooner? It can be a truly powerful tool if used correctly.
Simply put, an offset account is a separate account that’s linked to your mortgage account, and money sitting in that account offsets the interest charged to your loan. You would need to make sure that the interest rate on your mortgage is variable as it rarely applies to fixed home loan rates.
For example, if you have a loan of $300,000 and $50,000 sitting in an offset account, then you would be charged interest on the net balance of $250,000 only.
A more attractive scenario is to have your $300,000 mortgage, plus the same sitting in an offset account. You wouldn’t be charged any interest at all in this case.
Many offset accounts act like bank accounts where you can have a cheque book, you can withdraw cash from an ATM, plus have direct debits set up to pay your bills. You can redraw any amount you want, just like a normal bank account.
And the news gets even better. Because interest on your home loan is most probably calculated daily, any funds sitting in the offset will reduce the interest charges.
A quick way of estimating your annual savings starts by estimating the average balance in your offset for a year. Let’s say it’s $10,000. If your mortgage interest rate is 6%, then your saving for the year would be $600.
$10,000 x 6% = $600
If you have a principal and interest loan, your bank may still expect you to pay the same regular instalment based on the outstanding amount in your mortgage. In this case, a greater amount of your repayment will go towards paying down the principal of your loan, helping you to pay off your home loan sooner.
A $600 interest saving means that your principal will reduce by this same amount – helping you to reach the goal of paying off your home loan sooner.
If your loan is interest only, the net amount (mortgage less offset balance) will be used to calculate the interest payable, and this will reduce as the balance in your offset increases.
Importantly, you need to understand that the effect of an offset account would be the same as if you had put extra funds directly into your mortgage.
So why bother? The advantage of an offset account is that you can make your spare cash work harder. Rather than sitting in a bank account earning 2 per cent or less, you can make it earn the equivalent of your mortgage interest rate.
While this is great news for your own home, beware of the tax implications if you are using an offset account for an investment property. If you withdraw funds from an offset account linked to an investment property to use for personal purposes other than another investment loan, then you lose the tax deductability for that amount. This is a mistake that cannot be undone.
Of course, speak to a tax accountant for more information based on your personal circumstances.
Moneylogue 
