An offset account is very much seen as a transaction account that is linked to your home loan account. Providing the balance of your account is at a positive amount, the account is offset daily against the money you owe on your home loan. This in turn reduces the amount of interest payable on the desired home loan. For example, if your loan is $400,000 and you have $100,000 in savings, using an offset account will mean you only pay interest on the outstanding home loan balance of $300,000, this action executed correctly can shave many years off your final home loan term.
Many offset accounts will need a minimum of $1000 in the account to be able to take affect and work in the manner desired, but in reality if you are able to keep a balance of at least $3,000 in the offset it will make a difference in the long term working in your benefit. To see the full potential of this, it will require you to have good discipline with your finances to ensure you don’t have the temptation to use the cash funds readily available for use should you decide to.
Using an offset account can be a great strategy to reduce your home loan amount and loan term however you need to have financial discipline to make it work for you. Without financial discipline in place this will outweigh the effectiveness of the exercise.
There are two types of offset accounts the loan products have to offer:
- 100% offset accounts are the most common form where the balance of the offset account is deducted from the outstanding principal before interest is calculated. The balance of this offset account doesn’t earn interest.
- Partial offset accounts can be explained as an online savings account where the interest which would be generated by the balance pays off the principal of the loan without having to pay tax on the interest. A 100% offset account can be a far more effective tool for reducing the interest paid on a loan.
If you have a question regarding anything spoken about in this article or anything related to Offset Accounts then click here to talk to your finance broker Gerry and he will be able to assist with answering any questions you may have.