Mortgage Offset
Mortgage offset accounts allow borrowers to use their savings and income to reduce the amount of interest they pay on their mortgage. This works by using the interest that would usually be paid to them on their savings to instead be deducted from (“offset” against) the amount of interest they owe on their mortgage. Furthermore, under this arrangement, as you don’t actually receive any interest on your savings in your hands (that interest is offset against your home loan debt rather than being credited to your savings account), no tax is payable on it. You get the full, tax-free benefit of the savings interest in reducing your home loan debt.
This often operates best when your mortgage offset account is used as your primary bank account – for savings, lump sum payments and salary payments.
Do note too, offset accounts are more common with variable rate loans, and not always available on fixed rate loans.
To demonstrate how a full mortgage offset account works, we’ll take a $200,000 mortgage as an example, on which you pay interest. Let’s say you also have $20,000 savings in an offset account, earning interest. When the $20,000 in the savings account is offset against the $200,000 owing on the mortgage, you will only be charged interest on a home loan debt of $180,000 ($200,000 - $20,000 = $180,000).
It is important to get professional advice to ensure this product suits you and your circumstances. Also check the interest rates for both your mortgage and the offset account – they can be different (the interest rate you earn on your savings can often be less than the interest rate you pay on your home loan). Some loans will offer the same rate of interest on the mortgage and the offset account and these are known as full offsets.
Mortgage offsets can be very effective if used correctly, but bear in mind that lenders often charge a higher than average rate on the mortgage, usually up to about 0.15 per cent, or may charge additional monthly fees, for the privilege of having this feature. It is important to do your sums, as it might not suit your circumstances, especially if you have a large mortgage and little savings to put in the offset account.
