What's so good about a mortgage offset?

By Nila Sweeney

An oragami house made out of money representing an offset loan

First, what is an offset account? An offset account is simply an account that is linked to your home loan in such a way that it reduces the amount of interest you have to pay.

"A savings offset account runs in conjunction with a residential loan, and the interest earned on the offset account is applied to reduce the interest payable on the loan," explains Steve Tovas from Neomoney.

"When you have an offset you don’t earn interest on your savings. However, you are benefiting as the interest on your savings is actually working to reduce the amount payable on the loan."

There are two types of offset accounts: a 100% offset and a partial offset. "A 100% offset is where the interest rates earned and paid are the same," Tovas says. "A partial offset is where the interest earned on the offset account is only a portion of the rate paid on the home loan."

The better product is the 100% offset account, as it means that interest on your savings is earned at the same interest rate as your mortgage.

For example, let’s look at Jessica’s situation. Jessica has a home loan of $323,500 with an interest rate of 6.95%, and an offset account with $45,000 in it.

She earns interest on her savings at 6.95%, which equates to $260 per month. This amount is used to "offset" the interest that accrues on her loan ($1,875 per month). Consequently, her monthly interest repayment on her mortgage is reduced to just $1,615.

So, it’s clear that offset accounts save you money. They can also help you reduce your tax bill, by offsetting taxable income from deposit accounts against interest paid in after tax dollars on mortgage repayments.

But if offset accounts produce such fabulous savings, why doesn’t every mortgage holder in the country have one?

To begin with, you need a decent amount of savings to get any value out of the offset. If your savings account rarely increases above a few thousand dollars, the interest savings won’t be significant.

Also, not all offset accounts are equal, and some are attached to significant fees. Some banks slug you with ongoing charges of up to $15 per month, or $180 per year, in order to have an offset account.

At the end of the day, however, most borrowers would benefit from having an offset account. If you don’t have one, or you’re keen to find out how much you could save with an offset, speak to your bank or mortgage broker today.

This article was originally written in May 2011 and was updated for formatting and content in July 2018

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