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  • Writer's pictureBret Mullavey

Understanding Offset Accounts: Your Secret Weapon for Mortgage Management

Updated: May 21

Discover the hidden gem in mortgage management: the offset account. Learn how it can help you chip away at your mortgage while keeping your funds within reach.


What is an Offset Account?


Imagine having a secret weapon in your financial arsenal—a way to chip away at your mortgage while keeping your money accessible. Enter the offset account. It's like having your cake and eating it too.

Let me break it down for you: Picture your mortgage as a mountain, let's say a $400,000. Now, imagine having $50,000 stashed away in an account linked to that mortgage. With a full offset account, every dollar in that account works to slash away at your interest, leaving you with only $350,000 of that mountain to tackle.


Am example of how accounts could be structure with an offset account and without.
No offset V Offset, where should you be holding your surplus cash?


How an offset account works in reality?


Just like your trusty transaction or savings account, the funds in your offset account remain easily accessible whenever you need them. But here's the kicker: every dollar sitting snugly in that account is actively reducing the amount of money you're paying interest on for your home loan. Interest is generally calculated at the end of each day on the balance of your home loan, less the balance of everything in your offset account.

But, and here's the catch, if you dip into that account for a withdrawal, you're essentially pulling your money off the front lines of your mortgage battle. Less money in the offset account means less firepower to combat those interest charges. So, while the accessibility is a perk, it's crucial to weigh the impact of withdrawals and your general spending habits on your long-term loan goals.



What’s the difference between an offset account and a savings account?


Choosing between an offset account and a traditional savings account? Here's why an offset account might be the superior choice for mortgage holders:

  1. Maximised Interest Savings: With an offset account, the interest you save on your mortgage can far outweigh the interest you'd earn in a standard savings account. By offsetting your mortgage balance, you effectively reduce the amount on which you're charged interest, leading to substantial long-term savings.

  2. Convenience and Flexibility: An offset account typically offers all the features of a regular savings account, providing easy access to your funds whenever you need them. Why keep extra cash languishing in a savings account when you can utilise the offset and redraw facilities at your fingertips?

  3. Tax Advantage: Unlike the interest earned in a savings account, the money you save on your home loan interest through an offset account isn't considered taxable income. This means more money stays in your pocket, further enhancing the financial benefits.



What’s the difference between an offset account and a redraw?


While both an offset account and a redraw facility can lead to similar outcomes, they operate quite differently. A offset account is just like a savings account linked directly to your loan. On the other hand, a redraw facility is more like a secret stash of extra payments you've made above and beyond your required minimums, ready to be tapped into when needed.

Here's the kicker: whether you opt for an offset account or a redraw facility, both can yield interest savings on your loan. But, there's a nuance. With a redraw facility, accessing those extra payments might involve a bit more red tape, as it's ultimately up to the bank to green-light your withdrawal request.

Now, some loans offer the best of both worlds, bundling a redraw facility and an offset account. When it comes to speed and convenience, accessing funds from an offset account typically takes the cake.

So, while redraw might seem like the always-accessible option, it's important to remember that the final say rests in the hands of the bank. With an offset account, you're in the driver's seat, with quicker and easier access to your funds.



Types of Offset Accounts


Let's start with the cream of the crop: the 100% offset account. This powerhouse puts every single dollar in your offset account to work, chipping away at your home loan balance with laser precision. Typically paired with variable rate home loans, the interest you earn on your offset account directly reduces the interest you owe on your mortgage each month. Translation? More of your repayments go towards whittling down the principal amount of your loan, bringing you closer to mortgage freedom with every payment.


But wait, there's more! Some lenders offer another variation of the partial offset account, although it's less common. In this scenario, only a portion of your account balance is used to offset your loan. Let's break it down: say you have a 40% partial offset account, and you've squirreled away $20,000 in savings. With a loan balance of $200,000, you'd offset $8,000 from your loan balance (40% x $20,000), leaving you to pay interest on the remaining $192,000.


Maximising your offset account’s potential


  1. Direct Deposit: Set up your salary to be deposited directly into your offset account. This puts your hard-earned cash to work immediately, slashing away at your interest burden from day one. Why let your money sit idle in an everyday account earning peanuts when it could be making a real difference in your mortgage repayments? Just be sure to weigh the pros and cons of salary sacrificing beforehand.

  2. Maximise Deposits: Don't stop at your salary. Channel every incoming dollar into your offset account—think tax returns, bonuses, inheritances, share dividends, you name it. The more you deposit now, the less you'll pay down the track. It's a simple equation: every dollar in your account means less interest to fork over later.

  3. Budget Discipline: Stick to your budget like glue. The more disciplined you are with your finances, the less temptation you'll have to dip into your offset account unnecessarily. Remember, every extra day your money stays put is another day of interest savings, bringing you closer to mortgage freedom.


The pros and cons of offset accounts:

Pros

Cons

1. Reduce Loan Length: By lowering the loan balance subject to interest while maintaining your regular repayments, you can shave years off your mortgage term

1. Relatively Higher Fees: Offset accounts may incur additional fees, so it's crucial to understand the costs involved

2. Save on Interest: The larger your offset account balance, the more you can slash off your interest repayments, translating to significant savings over time

2. Relatively Higher Interest Rates: Home loans with offset accounts can carry higher interest rates. Crunch the numbers to ensure it aligns with your financial goals.

3. Potential Tax Benefits: The interest benefit derived from your offset account isn't considered taxable income, potentially offering tax advantages

3. Large Deposit Requirement: To justify if there are additional costs associated with an offset account, you typically need a larger balance in the account to see the benefit

4. Flexibility: Enjoy unrestricted access to the funds in your offset account, providing financial flexibility when you need it most

4. Financial Discipline Required: Regular withdrawals from the offset account may diminish the full benefits of the feature, necessitating discipline in managing your finances. There really is no substitute for good money management and sticking to your budget / goals


Wrapping up, offset accounts can be formidable ally in the quest to manage your mortgage smartly while ensuring your funds remain within reach. By chiseling away at your home loan interest, these accounts offer not just savings but potential tax advantages too. Yet, it's crucial to balance these benefits against potential downsides like associated fees and the need for disciplined financial management.


With smart consideration and strategic use, offset accounts can be pivotal in fast-tracking your journey to pay off your loan.

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