Securing an offset account when establishing any home loan mortgage can be beneficial to those who have a focus on wanting to save thousands of dollars and pay their home loans off faster.
Mortgage offset accounts aren't exactly new, but they are a recent banking innovation that evolved from lines of credit loan products. Lines of credit were the flavour of the month for quite a while, however many of their users found to their detriment that they couldn't resist the temptation to spend the easy money that was on offer.
Because, with a line of credit you only needed to make interest only repayments and in some instances you didn't have to make any payments at all. This was made possible when you had a line of credit with a pre-approved limit (a bit like a giant credit card). In other words when you established the loan you got the bank to give you a loan limit for more than what you immediately needed.
Anyway, at the end of the day the banks found they were starting to lose custom, because of the waning popularity of the line of credit. So, some genius in the backroom came up with the solution for these declining sales, which was the offset account, or mortgage offset account as some call them.
Less Temptation - With a Better Result
One issue that was removed with the use of offset accounts is that the borrower must make a regular repayment. This can be either a principal and interest repayment, or an interest only repayment.
How it works
With the initial set up of your loan, the bank simultaneously sets up a transaction account for you that you're able to deposit your cash into. This could be your pay cheque/s, money from other sources like rental or investment income received. Even one off payments you may have received from selling something like a car, can be deposited into the offset account (transaction account).
The payoff is, that any money that sits in the offset account (transaction account) will automatically reduce the amount of interest you have to pay on your mortgage.
In other words, any money you have sitting in your offset account on a daily basis will automatically offset and reduce the balance of the loan that you have to pay interest on.
Are you getting the picture?
For arguments sake, let's say you have a $400,000 mortgage and you have accumulated $10,000 into your offset transaction account. This means that the $10,000 offsets against the $400,000 and now you only have to pay interest on $390,000.
There, I knew you would get it.
But, wait a minute, you say. Hold your horses, not so fast!
I can't leave the whole ten thousand in there all month. I've got to live, expenses to pay, food for me and my family.
What about those issues?
That's not a problem at all. With today's technology the banks computers can do the interest calculations on a daily basis. In fact, that's exactly what they do. They keep track of the daily balance in your offset account and they charge the accrued interest back to your loan account monthly in arrears.
In other words they total everything up at the end of the month and then charge it back to your loan account. In the meantime, you have benefited from the interest savings your cash deposits have earned you while they were sitting in the offset account.
Wait! The Deal Gets Even Better
It's a pretty good deal all up, because interest saved is interest earned and its tax free.
Think about that for a moment. If you deposited the same amount of money in a savings account, what would you earn in the way of interest?
Maybe four percent on a really good day, but more than likely less than one percent.
But, even if you earned the four percent, you would still have to pay tax on it.
Whereas with your offset account, you saved interest, you didn't earn interest, therefore no tax. And depending on your tax bracket, in today's market, you would have to find an interest bearing account paying approximately 6-8% before tax.
If you don't already have an offset account attached to your mortgage, it's worthy of your serious consideration.