An offset account is a transaction account that is attached to your mortgage. As the name would suggest, the amount you have in your account will offset the interest in your home loan. So if you have a loan worth $500,000, and have $30,000 in your offset account, you will only pay interest on the difference between the two, which is $470,000 instead of the full loan amount. This could translate to several thousands of dollars in savings in your interest payments over the term of the loan.
Whilst lowering your interest payments is the main and most obvious benefit of an offset account, there are also other benefits including:
1. No restrictions. In general, you can deposit and withdraw money as often and as much as you like, both into and out of your offset account. This is unlike a redraw facility where there are certain restrictions on withdrawals. Your lender might charge you up to $50 for every withdrawal that you make, and may allow you to make only two withdrawals per year.
2. Tax benefits. The money in your offset account isn’t considered taxable income since the account doesn’t generate any interest. This is especially advantageous if you have large sums of money deposited into the account.
3. Make the most of your extra income. If you have other sources of income, putting it to your offset account will help you make the most of it. These include your bonuses and profits from your investments. Not only is it easily accessible for whatever purpose you require, but it can also help lower your interest repayments as we mentioned earlier.
Despite these advantages however, there are also some disadvantages to having an offset account that you need to be aware of. These include:
1. Higher costs. Offset accounts are typically more expensive to own than most types of loans. The interest rate is usually higher, and there are also bank fees and charges that come with your account.
2. Higher deposit to enjoy benefits. Offset accounts aren’t for everyone in that it requires a considerable deposit for you to actually benefit from it. This is because only a relatively large amount of money in your account will be able to negate the bank fees and charges, as well as create a considerable impact on your interest repayments. So if you don’t have a huge amount of cash to deposit, you may be better off with a standard variable rate home loan with no offset facility.
With a wide variety of products in the market, there’s a good chance that an offset account isn’t the only feature that will help you get the most out of your home loan, so make sure you consider all features. A professional mortgage broker will be able to help you find a loan that is truly suited to your needs.
Written by Joe Del Borrello