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Mortgage holders who want to keep and take advantage of the habit of saving can ask their lenders about the offset account feature for their home loans.

An offset account can potentially save you a significant amount of interest while also reducing the length of your home loans.

What is an offset account?

An offset account is a transaction account connected directly to a home loan. It works like a high-interest savings account, but 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.

What are the benefits of an offset account?

An offset account is one of the most useful features a home loan can have. Here are some of the benefits of getting an offset account for your home loan:

  • It works like an accessible savings account: An offset account is like any other everyday account, which means the money sitting in this type of account is accessible. The fees you must pay for account-keeping and transactions may also be lower.
  • It helps reduce your interest costs: If you have more money in your offset account, the less you may have to pay on your mortgage. Funds are accounted daily against your loan balance.  
  • It allows you to pay your loan sooner: Given the savings you get from having an offset, you will be able to pay your loan sooner. However, this depends on how much you have on your offset account.
  • You can take advantage of tax deduction: 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.

Are there types of offset accounts?

There are two types of offset accounts: partial and full offset.

A full offset account, sometimes called a 100% offset, allows you to use the interest you accrue on your funds to reduce the interest you pay each month on your loan. This means that every dollar in your offset account will be used against the balance of your home loan.

In a partial offset account, only a portion of your account balance is offset against the home loan.

Some lenders offer offset accounts for free but there are also some that attach significant fees for the use of this feature.

How does an offset account differ from a redraw facility?

While both offset accounts and redraw facilities help you reduce interest on your mortgage, the difference lies in the accessibility of funds.

Despite having the same concept, these features are different. An offset account is like a normal savings account, while a redraw facility varies from lender to lender and may have a minimum required amount per redraw. You may also have to pay redraw fees.

Furthermore, the funds you put into your redraw facility are considered extra repayments and are paid against the principal amount of the loan.

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 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.

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