What is an offset account?
With a mortgage offset account (also known as a home loan offset account), the borrower takes out a home loan (you can also do this with standard variable or fixed rate home loan types), opens a savings account or transaction account, and links the account to the loan. The benefit of an offset account is that the money (or credit) in your account is “offset” daily against your loan balance, meaning that the loan pretends that you have paid the balance of the account off your loan.
This will reduce the mortgage interest charged accordingly. So you might have a $200,000 loan and $15,000 in your offset account. Because of your offset account, you will only be charged interest against $185,000.
Benefits of a Mortgage Offset Account
By having a decent amount of money in your offset account, you can effectively cut years and thousands of dollars from your home loan. They also work just as well if you have your salary deposited into a standard savings account every payday – you don’t need a huge amount of spare savings. In this way, you can shave countless dollars and years from the life of your home loan.
After rate cuts, job promotions or even lottery ticket victories – it’s easy to think hopping into the home-buying market will be a simple process where the savvy investor will win big. However, taking out a mortgage can be wrought with danger, especially if your financial situation changes or a rate change leaves you paying extra each month. Luckily, an offset account is one way to combat huge jumps in your monthly mortgage payments.
How to choose an offset account
When choosing an offset account, look for:
- No balance limit, so you can keep building your savings and cutting down on your home loan term.
- An account where 100% of your total balance is offset against your loan.
- This account should be identical to other standard savings or transaction accounts, with a bank card for electronic transfers and the ability to withdraw money from ATMs when you need.
- An equal interest rate to your mortgage.
The last dot point is particularly important, as any interest earned in your account will also offset your mortgage interest – so you’ll enjoy further savings. This offset is also completely tax free.