An offset account links a home owner’s mortgage with savings held in the same bank. The savings earn no interest, but the amount available is deducted from the loan balance while calculating the daily interest due. The loan gets paid off faster and requires less interest overall, and there are other benefits such as lower taxes and cash available for withdrawal as and when required.
The key to the whole offset business is the fact that banks pay a smaller interest rate on savings while they charge a higher rate for loans. Assume a home owner has a pending $100,000 home loan at 8% and $20,000 as savings accruing interest at 4%. By linking both, the daily mortgage interest is calculated on $80,000.
So the customer is now saving 8 percent interest on $20k, instead of earning 4 percent interest on the same amount. Of course, this is just the basic concept. There is a tax benefit on top of this, because interest earnings in bank accounts are considered taxable income.
Depending on whether the customer is in a high tax bracket, this will further eat into the actual savings. On the other hand, the difference in mortgage interest saved is not taxable so it leaves the full 8% as savings. All said and done, if managed properly, an offset account can easily create an extra 5-6% savings as compared to savings accounts.
As a bonus, the money is not actually locked up or paid off into the mortgage. It’s still there in the savings a/c and can be withdrawn, used and paid back in as required. There is no paperwork or delay, and no transaction fees charged when drawing the money. When it is put back in, the funds are again used to reduce the loan amount.
This comes in handy when an investor wants to complete a quick buy and sale transaction, or when a business owner needs urgent funds to get raw material for fulfilling an order. Along these lines, note that both savings and current accounts can be linked to the mortgage. Actually, the concept first became popular when it was used with current accounts.
Current account mortgages (CAMs) were used to pool a customer’s debts, loans and deposits. Every day, the bank would tote up the mortgage balance, card debt, personal loans and any other debt a customer may have with them. The customer’s offset account balance is then deducted from the total debt, and a single interest rate is applied on the net debt. It simplifies banking and personal finance, and also reduces the net interest payable over the long run.
Make substantial interest savings on your home loan by using an mortgage offset account that will slash years off your home loan. You can also use a mortgage offset calculator. to estimate just how much you will save. Also published at What Is A Mortgage Offset Account?.
