The Truth behind Offset Accounts
What is an offset account and how does it work??
An offset account is a transaction account which is linked to your mortgage. The money you save in your offset account reduces the interest you are liable to pay on your mortgage. The bank works out your interest by calculating how much you owe and then deducting how much you have saved.
For example, you have a mortgage of $350,000 and have saved $50,000 in an offset account. The bank works out your interest liability by deducting the $50,000 you have saved from the $350,000 you owe. You are now paying interest on $300,000!
Offset accounts are a tax effective way to save. You do not pay tax on interest which would be earned if your money was in an ordinary savings account. Instead of paying tax you reduce interest payments!!
The interest rate you pay on most loans is around 5 per cent. If on the other hand you were to put the money into an ordinary savings account, you would only be earning around 2.5 per cent interest. So in other words you would be saving interest off your loan compared to what you would earn by putting the money into a separate savings account.
By tucking the cash into an offset account you have the advantage of having access to your savings. This can be a simple, flexible and efficient way to handle your money.
These days some banks offer multiple accounts offsetting one loan. This allows you to separate your savings, which can help when you are saving for a specific purpose, such as holiday or a deposit to buy another property. At one look you can see how much you have saved towards that specific goal.