When you’re applying for a home loan, some lenders will give you the option of having an offset account. This is a transaction account you can link to your home loan that may be able to help reduce the interest you pay on your home loan. The balance of the offset transaction account is effectively offset daily against your outstanding home loan balance.
No interest on a portion of your home loan.
In a nutshell, an offset mortgage is when you use money in your savings or current account to help reduce the mortgage balance that you are charged interest on. Let’s say you have a home loan with the balance of $200,000 but you have $25,000 in savings, then the bank would only charge you interest on $175,000. It’s really important to understand that you don’t receive interest on the funds in your savings account. The advantage is that you don’t pay interest on a portion of your home loan.
This means that the amount of interest charged is based on the net amount. The amount you’ve borrowed on your home loan minus the amount sitting in your offset transaction account. With easy access to your offset account, you’re ready for the unexpected. No interest is paid to you on the funds in your deposit account when you have an offset facility as you’re using your funds to reduce the interest on your home loan.
An offset account allows you to make the most of your income and other funds to reduce the amount of interest payable on your home loan while keeping instant access to that money should you need it.
An offset account can help you save money and reduce your tax bill.
Why is that so great? Home loan interest rates have been higher in savings interest rates. So you’re better having savings in an offset account than in a savings account. There are tax advantages too. Interest earned on savings are subjected tax at your personal tax rate. In contrast, you don’t pay tax on the interest you save on your home loan.
For example, if you invested $25,000 in a high-interest account for twelve months at 4%, then you would earn $1,000 before tax. If you pay tax at thirty four cents in a dollar (i.e. 34%), your net return after tax will be $660. Whereas if instead you take the $25,000 and put it in your offset account when your home loan is at 4.5% per annum, then that would save you $1,125 over the course of one year. Here’s a challenge for you though… try and find a high-interest savings account that is offering you 4% at the moment…
Putting the funds in an offset is almost twice as valuable. The higher your personal tax rate, the greater the benefit will be. Provided that you don’t spend the money in an offset account will save you money in the long run. So aside from it saving you money, the money in an offset account is easily accessible in case you need it.
If you’re considering getting an offset home loan, the question to ask yourself is this – can you expect to save more by having it than if you did not? Of course, that is something Pearl Financial can help you with. Get in contact with us to discuss further.
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