How Does a Mortgage Offset Account Work

how does a mortgage offset account work

Mortgage offset accounts are a great way to save money on your mortgage. But how does a mortgage offset account work? 

In this article, we’ll explain all the advantages and disadvantages of using an offset account with your mortgage, the different types, how it works, and how much you can save. Keep reading to find out everything you need to know about a mortgage offset account!

What is a Mortgage Offset Account?

Offset accounts are a type of savings account that can reduce the interest paid on a mortgage. They work by linking your transactional account to your home loan. The offset account then offsets the amount outstanding on your mortgage, lowering the loan’s interest paid and overall term.

There are two main types of offset accounts:

  • A 100% offset account has the same effect as a reverse mortgage, but it also retains any interest earned on the principal. The account’s entire balance is used to offset the interest owing on the related mortgage. It is available for either variable or fixed-rate home loans.
  • If you have a partial offset account, it will only compensate for a portion of your mortgage. The more significant the proportion of the offset account, the more interest you will save on your mortgage by its use.

For example, if you have a loan for $350,000 with $50,000 in a linked 50% offset account and you pay interest on only $325,000 of your balance, this is quite typical. Fixed-rate house loans are frequently the case.

Recommended Reading: What is a Tax Offset?

How Does a Mortgage Offset Account Work?

Offset accounts work by using up to 100% or part of the balance of a linked transaction account to reduce the amount of interest charged on your home loan. For example, if you have a loan with a balance of $350,000 and $50,000 in a linked 100% offset account, you will only be charged interest on $300,000 of your debt. 

On the other hand, an offset account is similar to a conventional transaction account with an account number and BSB number in terms of functionality: you can deposit money (such as your salary) and make withdrawals and payments.

How much can you save?

Let’s assume you took out a $400,000 mortgage with an interest rate of 5 per cent and paid it off in 30 years. For the duration of the loan, you keep $10,000 in your offset account. You save approximately $30,000 in interest over the life of the loan. You reduce your repayment time by more than a year.

How to use one?

Some people may deposit their pay straight into their offset account, which they view as a regular bank account. Others may utilize their offset for holidays or renovations or for less glamorous reasons such as planning for tax payments.

Advantages and Disadvantages of Mortgage Offset Accounts

The benefit of offset accounts:

  • Tax-free earnings, which can be helpful if you’re using your offset account as a savings account to supplement your retirement fund
  • You can save on interest rates by having a smaller loan amount
  • Offset accounts are flexible – you can access your money at any time without penalty
  • Your mortgage lender may offer a lower interest rate if you have an offset account

The offset account disadvantages:

  • They can be more challenging to access than a regular savings account
  • If you don’t have much money on your offset account, it might not dent your overall interest payments
  • You may be charged extra fees if you take out a loan with an offset account

Bottom Line

Mortgage offset accounts are a great way to save money on your home loan. We’ve explained how does mortgage offset account work and how to use it in conjunction with a regular savings account, or for other purposes, such as planning for tax payments. 

Still, they can be more challenging to access than a standard savings account, and you may be charged extra fees if you take out a loan with an offset account. So, do your research before deciding if an offset account is the right choice.

FAQs:

1. What is a mortgage offset account?

A mortgage offset account is a savings account linked to your mortgage. The balance in the account offsets (or reduces) the amount of interest you are charged on your mortgage.

2. How to use a mortgage offset account?

Some workers may deposit their pay directly into their offset account, which they would consider a regular bank account. Others might utilize their offset for things like vacations or home improvements, or less exciting purposes such as tax preparations.

3. How long to pay off the mortgage with an offset account?

Pay off your mortgage. Keep adding to your offset account until you’ve paid off the loan, and then pay it off. This way, you’ve eliminated your obligation. However, the offset account has $0 remaining. If this is the bulk of your savings, you now have nothing. Maintain the loan open for further assistance if required. Add funds to your offset account monthly, but don’t withdraw the loan. You may add a little bit of money to the offset account each month. Your debt is minimal, and you’re not paying much interest. Plus, you have a lot of cash in the offset that you can readily access.

4. How does a mortgage offset account work?

A mortgage offset account is a savings account linked to your mortgage and helps you pay off the balance of your loan. The amount in the account reduces (or offsets) the amount of interest you pay on your mortgage.

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