A mortgage offset account is a savings or transaction account linked to your home loan. The balance of the account offsets your mortgage which allows you to save on interest and even pay off your home loan in a third of the term.
Offset accounts can be linked to variable and fixed-rate home loans, and can be set for a period or full duration of the loan.
There are two types of offset accounts. A balance offset account that offsets the interest payable on the mortgage by the balance of the account and is usually set to a percentage of 50-100%.
An interest offset account offsets the interest payable on your mortgage by the interest earned in the account. This is a less common form of offset account, and may not result in the same level of savings.
While most mortgage brokers recommend an offset account, there are a number of factors to consider when locking in your home loan.
The Benefits
You pay less interest.
The balance of the account offsets the balance of your home loan, meaning the bank works out the interest on a lower figure. Over time this could save tens of thousands and allow you to pay off your home loan sooner.
They are an easy way to manage money.
Many people choose to pay their salary, or the majority of their salary, into the account and stick to a budget. It allows savings on the home loan and encourages responsible spending as every dollar in the account saves you more in the long term. They also offer no restrictions so you can continue to save and spend as usual.
Couples with double incomes can deposit one into the offset account and live off the second – allowing a simple saving solution.
You can save on tax.
Money deposited into an offset account isn’t considered taxable interest, making it a better option than a high-interest savings account – which incurs tax each financial year. This is especially helpful if you have a large sum of money in savings, and will knock years off your home loan while giving you access to the funds.
Every little extra bit counts.
No matter where you make money, adding it into an offset account works to your benefit. Whether you sell the second car, receive a bonus or inheritance, or win the lotto, the added funds will give you peace of mind and long term savings.
The Cons
Banks may charge higher interest.
Because lenders make their money on the interest paid to a loan, locking in the lowest interest rate may not be available to you. This is something you can negotiate when sorting the details of your home loan, and is something to consider when choosing an offset account.
Fees
Offset accounts are often subject to annual or transaction fees, and this is something you may be able to negotiate with your lender or mortgage broker.
