What are Offset Accounts and How can they Save You Money
Offset accounts are an easy way to shave thousands of dollars off the value of your home loan and can even offer you tax advantages.
An offset account is simply a savings or everyday bank account linked to your mortgage. The amount of money in this linked savings or everyday account is then subtracted from the value of the mortgage and the interest on the loan is charged on this reduced amount.
Clearly there is a tremendous potential for sizeable savings on interest repayments over the life of your loan with the use of an offset account, but exactly how much you may ask?
Consider a couple owning a Sydney home with a loan for $550,000 at an interest rate of 5.4% over a 25 year loan term. Under normal circumstances this couple will pay $453,906 in interest repayments however If they establish an offset account and sustain an average balance of $10,000 over the life of the loan this couple will only pay $426,327 in interest repayments hence saving $27,579 over the course of the mortgage or well over $1000 a year.
Offset Accounts also provide a major benefit to many people in the form of their tax treatment. Consider a family with a $100,000 loan balance and $20,000 in their offset account. If the family redraws $10,000 to use for any other purpose whatsoever then the ATO will still view the family as having a $100,000 loan balance since the redraw account although linked to the home loan is actually a separate account. This means that if the family claimed the mortgage and interest expenses of its $100,000 loan as a tax deduction then this tax deductibility would be maintained despite the money being withdrawn.
However, there is a single downside to offset accounts in the sense that they do not earn interest but considering many banks offer such low interest rates on their savings and everyday accounts this downside is almost entirely nullified hence making the use of offset accounts an extremely viable option for your savings.
If you have any questions about offset accounts, seek advice from a Sydney financial advisor.