Mortgage Offset Account: What Is All the Hype About?

You may have heard the term 'mortgage offset account' without being entirely sure how it works or how it helps reduce a mortgage faster. Also known as an offset home loan or interest offset account, this is a financial facility linked directly to a home loan account.

How does it work?

There are essentially two accounts in an offset facility. The first is a transaction account where savings are kept, similar to a standard savings account. The second is the home loan account itself.

An offset account helps to reduce the amount of interest paid on a mortgage, which in turn helps reduce the principal balance at a faster rate. Because interest is calculated on a lower net balance, a borrower may be able to pay off the loan sooner or build equity faster.

Example

For instance, consider a $100,000 mortgage with a linked offset account containing $10,000. In this scenario, the loan balance used for calculating interest is reduced by the $10,000 held in the offset account. Interest is therefore only calculated on $90,000.

Potential Benefits and Strategies

Mortgage offset accounts function similarly to a standard savings account, except that rather than earning interest on savings, money is saved on home loan interest.

For example, earning a rate of 3% on savings may be subject to tax at a marginal tax rate. On the other hand, reducing mortgage interest by 5% saves on interest without generating taxable income.

A central goal for many home buyers is to pay off the loan as quickly as possible. Linking a mortgage offset account to a loan offers additional flexibility and financial strategies.

Mortgage offset accounts can be used as fully functional transaction accounts to regularly manage cash flow. Work income and rental income can be directed into the linked offset account, allowing these balance sources to reduce home loan interest daily.

Conversely, if funds are not held in the account regularly, the benefit of an offset account may be limited. In many cases, an offset account carries additional product or package fees. If an offset account is not used regularly as part of a debt reduction strategy, it is worth evaluating whether the fees outweigh the interest saved.

Using a mortgage offset account is a practical strategy to lessen the interest burden on a home loan.