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OFFSET ACCOUNTS – How they can save you $$$ on your home loan

By December 5, 2018 No Comments

An offset account may help you pay less interest on your investment home loan when you have your investment property’s income deposited into it.

What is an offset account?

 An offset account is a savings account or transaction account linked to your home loan account. The account’s balance (or a proportion of that balance) is ‘offset’ daily against your home loan balance, and as a result you’re only charged interest on the difference between the total loan balance and the amount offset.

This means the lender charges you less in interest because they are not charging you interest on the full, actual remaining balance of your loan.

Offset accounts may be linked to either a variable rate loan or a fixed rate loan. Some home loans may specify that the offset applies for a fixed term, such as a 100% offset for a year against a one-year fixed rate loan.

For example, if you had a loan of $350,000, with $100,000 in a linked 100% offset account and $100,000 repaid, you may only pay interest on $150,000 of your balance.

How much could you save using an offset account?

An offset account can be a great way to save thousands of dollars in interest on your home loan.

As a purely hypothetical example, Canstar has calculated the benefit of holding either $20,000 or $40,000 in a mortgage offset against a $300,000 home loan.

As the table below shows, even a relatively small amount of savings stored in an offset account could save you thousands of dollars in interest over just three years, allowing you to repay more of your loan amount faster. When you repay your loan faster, you pay even less in interest over the life of your loan.

How can you take advantage of this for your investment property?

The way that many investors structure their loans, is that they have their rent paid into an offset account, and from here they make loan repayments into their investment account.

If interest is calculated daily, and your agent disburses rent more frequently (for example weekly as opposed to monthly or bi-monthly), this can have a big impact on the amount of interest you are charged over the life of your loan.

As this information is general in nature, we recommend you seek advice from your Accountant to see if you would benefit from using an offset account.

 

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