What is a Mortgage Offset Account?
If you have a home loan, then a mortgage offset account, is a great place for your extra cash. It will help you pay off your home faster. With an offset account, you can save thousands of dollars and take years off your mortgage.
Need access to your funds? Not a problem. A mortgage offset account is an 'at call' cash account. There is no obligation to lock your funds in. An no penalty for making extra deposits or withdrawals. An offset account gives all the features of a cash account including:
- Internet Banking
- Access through ATMs
- Direct Debits
- Cheque books
How Does a Mortgage Offset Account Work?
You will not earn any interest in your offset account. The balance will be used to 'offset' the interest you are being charged on your linked home loan. If you owe $315,000 on your mortgage, and have $10,000 in a 100% mortgage offset account, then you will only be charged interest on $305,000.
Paying money into your Mortgage Offset Account, has impact on interest, as making extra repayments on your home loan. The balance which mortgage interest is charged = Mortgage Balance - Mortgage Offset Account Balance ($315,000 - $10,000 = $305,000).
The more money you have in your mortgage offset account, the less interest you will pay on your home loan. Saving interest on mortgage, is better than earning interest from a savings account for the following reasons:
- The Interest Rate is
Higher -The interest rate banks charge on loans, is higher than the rate they pay on savings accounts. A mortgage offset account, will save you more money than a savings account will earn you.
- There is no additional risk - A mortgage offset account and a savings account, are both cash accounts. By using an offset account, you are increasing your return without increasing your risk.
- You will pay less tax - Any interest you earn from a savings account, is part of your annual income, you will pay tax on it. There is no tax on the interest you will save from using your mortgage offset account.
How much will you save with an offset account?
Let's look at a hypothetical case to compare two borrowers, Mr. Offset, and Mr. Savings. For simplicity, we'll assume:
- They each have a mortgage of $315,000 charging interest at 4.40%
- They each have a savings account which pays 2.00%
- They each have $10,000 to put in cash account
- They both pay interest only on their home loans
- They both have interest paid out of their savings accounts (so there is no compounding).
- Mr. Offset puts his $10,000 in a mortgage offset account
- Mr. Savings puts his $10,000 in a savings account
- They both pay income tax at a rate of 30%
After 12 months, Mr. Offset would be $300 better off than Mr. Savings this is illustrated in table below:Source: www.finance-guy.net