Depending on what lender and home loan product you choose, it may have an offset account as a feature. But what is an offset account?
An offset account is a savings account attached to your loan. It allows you to reduce the interest on your home loan without physically putting money into the loan itself. You will save the same amount in interest either way but an offset account is a handy feature that allows you to keep your savings separate but still save in interest.
When the interest is calculated on the loan, which is usually daily, the balance of funds in the offset account is added to the loan. This means that the amount you are charged interest on is reduced by offset account balance. So instead of earning interest you are paying less interest on your loan and thus more of your repayment will be going to paying the principle and less towards interest.
An offset account is great place to deposit your savings. As it is a separate account, you will have clear visibility of what you have saved and transactions in the account. If you deposit funds into the loan itself and then draw them out, the transactions are all mixed up in the loan account. Having your savings in a separate account can provide convenience and flexibility especially when it allows transactions and no minimums on transfers. Your cash can be saving you interest right up to the time it is needed.
If you are claiming a tax deduction on the interest, then most accountants will advise you not to deposit your own funds into the loan and draw them out unless they are used for tax deductible purposes. The offset account gives you the ability to keep your own funds separate but stillsave in interest.
So, should you have an offset account? One of the great things about an offset account is that it can be beneficial no matter if you are a saver or spender. For a spender, you can have your salary paid directly into your offset account as the money will have an immediate impact on the amount of interest you pay as the interest is calculated daily.
If you are a saver, you may find that an offset account is more beneficial than a savings account as you may earn less interest on a savings account than what you would save on your home loan. You also won’t be paying tax on the interest that you earn either; instead it is equity that is building up.
When researching and comparing home loans, it’s worth looking at any possible fees or restrictions to moving money around that may be associated with the offset account. Some lenders may have minimum transaction amounts and withdrawal fees if you decide to redraw money from your offset account and these fees could end up costing you more than the interest you would save. Make sure you speak with lenders to understand how the offset account operates.
Before making any decisions, you will need to carefully research your options and speak with your financial adviser and lender, then weigh up their advice as to what will work for you. State Custodians has offset accounts as a feature on a number of our most popular loans. Call 13 72 62 to explore your loan options with us.