How To Use An Offset Account To Pay Off Your Home Finance Loan Much Faster!

Lake Haven Home Loans Offset Accounts

An offset account is really a separate deposit account linked to your home loan. The interest earned on these savings is offset against the interest you'll pay on the home loan.

You can choose to direct your income into the savings account and use it for all EFTPOS, cheque, internet banking and credit transactions. Another benefit is that you do not end up paying income tax on any interest earned as it is used to offset the interest payable on your loan.

Your balance in the account is offset against your loan. The more money you keep in your account, the faster your loan is reduced. These types of home loans are usually charged at the standard variable rate or higher, and may also have other fees attached.

For Homeowners with some extra funds in the bank, it may be well worth thinking about a mortgage offset account. It offers a tax-friendly way to put your savings to work by lowering your home loan interest repayments.

An offset account is generally a savings account connected to your home loan. Instead of being paid interest on your savings and paying separate interest on your mortgage loan, the balance of the offset account is subtracted from the balance of the loan when interest is calculated.

Here’s the way it works. We’ll say, as an example, that you’ve got a mortgage of $200,000 with interest charged at 7.1%. Let’s also assume you have got an offset savings account with a balance of $15,000. Instead of receiving interest on the deposit of $15,000 and paying interest on the full balance of the mortgage, interest 7.1% is charged only on the first $185,000 of the home loan ($200,000 less $15,000) and no interest is paid on the deposit.

This has significant tax benefits. So far as the Australian Tax Office is concerned you haven’t received any interest on your deposit, therefore it is not a part of your taxable income. Which means you are receiving the full benefit of the return on your deposit without losing up to as much as 45% in tax.

An offset account can also help you to repay the mortgage sooner as more of each and every regular repayment is going toward repaying the principal - not just the interest charge.

With this mortgage, the regular monthly payments would be around $1178. If the offset account has a balance of $15,000, the interest charge on that $200,000 loan would be based on a balance of $185,000.

Which is around $90 additional from the principal each month than without having the offset. It’s a fantastic method to swing the mortgage pendulum in your favour instead of your lender’s.  Put another way, if you keep a minimum of $15,000 in your offset savings account over the term of the loan that is a saving of more than $85,000 and lowers the loan terms from 30 years to less than 25 years.

The most effective offset accounts are the type which offer you the same interest rate on both the deposit as well as the home loan. This is often what’s called a ‘full’ or ’100%’ offset and it means you receive a double-whammy gain on your deposit as the rate is higher than you’d normally expect to get on the separate savings account, plus you’re receiving it tax-free.

Having said that, on the downside, several lenders make up for this by charging you a higher rate of interest on the mortgage. as with all financial products, it is advisable to do your sums to be sure an offset makes it worth while for you personally.