Saving Money with a Mortgage Offset Account

If you own a home and have some extra cash, a mortgage offset account is a great way to pay off your home loan sooner and enjoy some tax benefits at the same time. These types of accounts are not for everyone so it pays to get some financial advice first before deciding on the best strategy to own your home sooner. Mortgage offset accounts are offered by all financial institutions and are quite simple to set up so you can start saving sooner. Some lenders, even if they specialise in fast home loans, may even offer mortgage offset accounts from the get go.

How they work

Mortgage offsets are a type of savings account that is linked to your home loan. Instead of playing extra off your mortgage, you pay that money into the offset account. The balance of the offset account is then deducted from your home loan when interest is calculated. The result is that you pay less interest on the loan. You don’t, however, get paid interest on the money in the mortgage offset account. For example, if you have $20,000 in an offset account that is linked to your $250,000 mortgage, then you are only charged interest on $230,000.

Tax benefits

Any interest we earn on funds in bank accounts must be declared at tax time. This interest can be taxed at up to 45 cents in a dollar – a big hit to your hip pocket. But by using a mortgage offset account you are actually not earning interest on your savings, therefore you can’t be taxed on it. So there is nothing to declare at tax time when it comes to your mortgage offset account, and the Australian Tax Office won’t come chasing you for anything to do with that account down the track either.

Own your home sooner

Mortgage offset accounts are also a great way to pay off your home loan sooner. This is because the money in the offset account is used to pay off the principal (how much you initially borrowed) and the interest. Each regular repayment helps to reduce the principal, meaning less interest will be charged. It means the more money you put into the offset account, the harder it is going to work at reducing your loan faster.

The right offset account for you

The best deal is the 100 per cent offset, which means the same interest rate is offered on both the savings account and the mortgage. It’s worth checking if there are any added fees involved with the account as it can effectively put you back a few financial steps. Some lenders may even increase the interest rate on your mortgage for a higher offset.

The best advice is to talk to a financial planner, a mortgage broker or your lender to see what suits you best and if a mortgage offset account is right for you. It can’t hurt to shop around either as there are plenty of competitive products – such as fast approval loans - available from a wide range of lenders, not just the big four banks.

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