The benefits of an offset account
One greatly beneficial product a number of lenders offer their home loan clients is an offset account. Offset accounts can potentially save you a significant amount of interest while also reducing the length of your home loans.
An offset account is a transaction account connected directly to a home loan. The balance of an offset account is subtracted from the remaining principal prior to interest calculation. This allows you to save money on interest without physically paying the funds into the loan itself, giving you the freedom to park your funds and save on interest while keeping the loan itself free of personal transactions. (If you are claiming a tax deduction on the interest – financial advisers generally promote the use of offset accounts for tax purposes, and most accountants will advise you not to deposit funds and then draw them out again.)
For people with owner-occupied home loans, convenience becomes the most obvious benefit. The savings in interest are the same whether you use an offset or if you pay the funds into the loan itself, but having it in a separate account can provide ease and flexibility, especially when it allows transactions and no minimums on transfers. In other words, your cash can be saving you interest right up to the time it is needed.
Should you have an offset account?
One of the great things about an offset account is that it can be beneficial regardless of whether you are a saver or a spender. For a spender, you can have your salary paid directly into your offset account, as the money will have an immediate impact on the amount of interest you pay, which is calculated daily.
If you are a saver, you may find that an offset account is more beneficial than a savings account as you may earn less interest on a savings account than what you would save on your home loan. You also won’t be paying tax on the interest that you earn; instead you will be building up valuable equity.
It’s worth looking at any possible fees or restrictions on moving money around that may be associated with an offset account. Some lenders may have minimum transaction amounts and withdrawal fees if you decide to redraw money from your offset account. These fees could end up costing you more than the interest you would save, so speaking with lenders in order to understand how the offset account operates is a must.
Before making any decisions, you will need to carefully research your options and speak with both your financial adviser and your lender. Weigh their advice and decide what will best work for you.