Hi, is this Aussem mortgage solutions? I am Matthew
Hi Mattew, yes it is, I am Suresh, how are you doing today?
Good thanks Suresh, how are you?
I am doing great! What can I do to help you today Matthew?
So, I just had a few questions about offset accounts, is that alright?
That’s perfectly fine, what would you like to know Matthew?
Well, first of all Suresh, I wanted to know what an Offset account really is.
That’s fine Matthew, so an Offset account is a bank account that is linked to your home loan which reduces the interest accumulation on your mortgage.
What this does is, instead of interest accumulating on your total home loan, money in the offset account is offset against your mortgage to reduce the payable interest.
So, for instance, if you have a mortgage of $500,000 and an offset account with $30,000, then you will only have interest on $470,000 and not the full $500,000. This way, in the long term you can reduce the total amount of interest you pay and the amount of time it would take to pay off the mortgage!
Oh I see how it works, so would I have to pay tax on the interest saved from the offset account?
Actually no, since there is no compound interest being earned from the offset account money, it does not get taxed. The saved interest instead adds to the equity in your property.
Wow that sounds great, can you still withdraw funds from the offset account?
Yes Matthew, you have the flexibility of depositing and withdrawing funds without any access fees as it is the same as a transaction account. As a result, you can also store a sum of money in the offset account to rely on during emergencies which is continually reducing interest paid on your mortgage.
That makes sense, just one more thing Suresh, what are the benefits of an offset account and who would it be suitable for?
Well, Off-set accounts work best when you can keep a large amount of money in the account over long periods of time. So, if you are a good saver, by saving money and depositing to the offset account, you can avoid paying taxes on interest while still making valuable gains in equity-like I mentioned before.
Also, instead of making extra repayments into your mortgage, you could deposit into an offset account as it provides a flexible alternative that lets you reduce your interest while still being able to access the money in case of an emergency situation.
Any additional money into the offset account will help reduce the long-term interest repaid, however only keeping a small amount in the offset account will not give you very significant savings. Just keep in mind that you should always be aware of any possible fees and conditions which come with the offset account as they may not be worth the savings in the long term.
Thanks a bunch, Suresh! That makes things a lot clearer.
Always happy to help, Matthew, if you have any other queries regarding home loans or refinancing, don’t hesitate to contact us again.