How an Offset Account Can Help Reduce a Home Loan

**What’s All the Hype About?**

You may have heard the term ‘mortgage offset account’, but are not quite sure what it is or how it can help reduce a mortgage faster. Also known as an offset home loan or interest offset account, this is a financial product acquired through a lender and is essentially a type of savings account linked to a home loan account.

**Fundamentals of a Mortgage Offset Account**

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 reduce the amount of interest paid on a mortgage, which in turn helps reduce the principal at a faster rate. Since the loan principal calculation is reduced, a borrower may be able to pay off the loan much sooner or build up equity faster.

**Example:**

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

**Potential Benefits and Strategies**

Mortgage offset accounts work similarly to a standard savings account, except that rather than earning interest on savings, interest is saved on the mortgage.

For example, earning a rate of 3% on savings may be subject to tax at a marginal tax rate. Conversely, saving 5% on a home loan avoids paying that interest to begin with.

Common financial strategies often emphasize paying off a loan as quickly as possible. Linking a mortgage offset account to a loan account offers potential benefits and flexible financial strategies.

Mortgage offset accounts can function as a fully featured transaction account, allowing regular cash flow management. Salary and rental income can be directed into the linked offset account, allowing these funds to offset home loan interest.

On the flip side, if funds are not held in the account regularly, an offset account may provide limited benefit. In many cases, an offset account incurs additional product fees. If the account is not used regularly as part of a mortgage reduction strategy, evaluating whether the fee outweighs the interest savings is an important consideration.

Using a mortgage offset account is a practical strategy to reduce the impact of interest on a loan principal.