When it comes time to choose a mortgage or refinance a home loan it’s easy to become confused with so many different products on the market. However one such product that may help you save on interest charges is a mortgage offset account – a type of transaction account that can help you pay your mortgage off sooner.
An offset account links your savings account to your mortgage, allowing you to ‘offset’ your savings, salary and other cash resources against your home loan. You pay less interest on your loan as you’re only charged interest on the balance.
Jeff Jurd, Head of Direct Mortgage Lending at HomeStar says that a mortgage offset account is simply a savings transaction account attached to your home loan that allows you to use any extra money you have to reduce the interest paid on your home or investment loan.
“As an example let’s use a homeowner with $25,000 in savings and a $300,000 mortgage. The monthly repayments for the loan would be $1,894 using HomeStar’s 100% Offset loan on a 30 year repayment term, with the monthly interest component of being $1,622,” explains Jurd.
However, the $25,000 in savings is generating ‘notional’ interest of $1,622 p.a which reduces the total interest calculation for tax purposes on a negatively geared property. “In the event that you deposited $25,000 in the offset account for a full financial tax year, then the tax deductible interest on your property loan would be $17,842, rather than the full $19,464,” says Jurt.
In terms of benefits, having a home loan with an offset feature allows you to utilise every spare dollar to help reduce the interest costs of your loan, white retaining easy access to your funds through a full banking transaction functionality. You can also benefit come tax time, depending on your personal circumstances.
“Under current legislation income tax is not payable because you earn no interest from the credit funds in the offset account as the benefits flow straight through to interest savings on your linked loan. Nor, under current legislation, is tax payable on the interest saved on your linked home loan,” explains Jurt.
The 100% offset structure also improves your cash flow and provides a higher rate of return compared to a standard short-term fixed or variable interest deposit account. “This is because your total monthly instalment is reduced by $135 per month,” Jurt explains.
Well suited to investors who may want to reduce their interest while also maintaining maximum tax effectiveness, an offset account is also useful for homeowners who have the capacity and dedication to save. But if you don’t have much cash to offset, watch out for the potentially higher variable rate that could cost you more than it saves.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan