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What is an offset account?

Michael Thomas

An offset account is a type of savings or transaction account linked to your mortgage that can help reduce the amount of interest you pay on your home loan. Here’s how it works:

How an Offset Account Works

  1. Linked to Your Mortgage: The offset account is directly tied to your mortgage. The balance in this account is used to "offset" the outstanding balance of your loan when calculating interest.

  2. Interest Calculation: Instead of earning interest on the funds in your offset account, the amount is deducted from your mortgage balance when calculating interest. For example, if you have a $300,000 mortgage and $20,000 in your offset account, you’ll only pay interest on $280,000.

  3. Flexibility: You can deposit and withdraw funds from the offset account as needed, making it a flexible way to manage your money while reducing your mortgage interest.

Benefits of an Offset Account

  • Reduced Interest Costs: By lowering the amount of interest charged on your mortgage, you can save money over the life of the loan.

  • Faster Loan Repayment: The savings on interest can help you pay off your mortgage faster.

  • Tax Advantages: Interest saved through an offset account is not taxable, making it a more efficient savings strategy compared to earning interest in a traditional savings account.

Types of Offset Accounts

  • Full Offset: The balance in the offset account fully offsets the mortgage balance.

  • Partial Offset: Only a portion of the balance offsets the mortgage, which may result in less interest savings.

Considerations

  • Fees: Some lenders may charge account-keeping fees for offset accounts, so it’s important to check the terms.

  • Interest Rates: While offset accounts can provide significant savings, you should compare the overall costs and benefits with other mortgage products.

Overall, an offset account can be a valuable tool for homeowners looking to reduce their mortgage interest costs while maintaining access to their funds.

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