What is an offset account??
I see it and hear about it a lot and don't really know what it is??
I have my savings in another bank, is that what it means??
Posting annon caus no doubt people will laugh about this.
Offset account
Offset account
Posted in:
Money
4 Replies
It's usually an account linked to a loan. I.e. if a variable loan has an offset account, the balance in the offset account is considered and can reduce the amount of interest charged in that month.
The only stupid question is the one not asked.
I have a no frills mortgage and it doesn't allow for an offset account, but it does have a redraw so all extra payments made can be withdrawn fee free. I sit my savings in the mortgage account. The interest it saves on the home loan beats the interest it would earn in any savings account.
An offset account works in the same way. It's an accessible account earning no interest but it is treated as extra money on your mortgage which reduces the interest you pay over the life of the loan (or while a balance sits in offset).
Offset accounts avoid some issues that can affect tax deductions for a rental properties.
If the loan is for the house you live in, basic loans with easy redraw options you can put your savings in are great.
You have a mortgage, and a bank account, with the same institution, which is set up to 'offset' interest against the mortgage. The amount of money you have in the account you don't pay interest on in the loan.
E.g. loan of 100,000.
'offset' bank account with $10,000.
You only pay loan interest on $90,000 (mortgage balance - offset account balance).
It's the same effect as putting extra money into your mortgage to keep interest down.
Offset accounts often come with an annual fee and slightly higher mortgage interest rate so you need to make sure the extra cost is less than you're saving by offsetting.
Does that help?