What Is A Mortgage Offset Account?

If you’re a homeowner, first home buyer, or even an investor, consider talking to your bank about activating an “offset account“.

What’s an offset account?

An offset account enables homeowners to save on mortgage interest by having cash set aside in a designated bank account (called the ‘offset’ account).

I find it’s best to use an example…

Let’s say Billy has a $500,000 mortgage. She also has $50,000 in a high-interest savings account earning 2.8% interest.

If Billy transferred $50,000 cash into a linked ‘offset account’ it would be ‘deducted’ or ‘offset’ against her outstanding mortgage.

So, instead of the bank charging mortgage interest on a $500,000 loan, they charge her for $450,000 ($500,000 – $50,000).

Who cares!

Using an offset account correctly may result in savings on mortgage interest and a boost to your after-tax income. I’m talking about $1,000 or more every year.

How does it help?

  1. A mortgage interest rate is usually higher than the interest you earn from a savings account. Meaning, you save more on the mortgage than you make on the savings account.
  2. It can be tax effective. Remember, interest on a bank account is taxed. So even if you’re earning ‘just 3%’ in interest on your savings account you will be taxed at your marginal tax rate. For example, if you have a 30% tax rate, you’re losing nearly 30% of your interest in tax.

How do I get one?

Call you bank or broker. Different banks have different ‘packages’ or ‘specials’ for mortgages. Most of these are a waste of time.

However, while some banks charge you extra fees or interest to have an offset account — some banks offer it for free and offer a low comparison rate. Shop around.

Or speak to a mortgage broker or a financial adviser. As always, read the terms and conditions before you sign on the dotted line.

The future you will thank you for it.

P.S. if you end up saving $1,000 each year in interest and you organise an offset account in under two hours, you’re effectively earning $500 per hour — cha-ching!

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