An offset account as the name suggests is an account that offsets the balance of your variable loan so that you only pay interest on the net balance.
The account has essentially the same features as a regular savings/transaction account that can have debit cards linked to it. However, rather than earning next to nothing in interest in a savings account (and then paying tax on that interest), an offset account allows you pay less interest on your loan repayments. For a home loan, this is especially powerful because you are reducing the interest that you would pay with after tax dollars.
For example, say you have a loan of $200k and happen to have saved $20k over the years or perhaps received a one off bonus or gift. That $20k could go into your offset account and you would only pay interest on $180k. This could take years off the loan and save you thousands of dollars in interest. Even if you added $50 extra a month into the offset account, the power of the interest could save you thousands in the long run.
In fact, every excess dollar you have could sit in the offset account, including your salary. Every little bit counts and if you are disciplined at saving the benefits can be enormous thanks to your little friend “The Offset Account”. Some banks even allow several offset accounts to be used to reduce the outstanding balance.
There are various other uses of an offset account that you should speak to your financial advisor about, including the ability to have funds in an offset account ready to pay a deposit for an investment property. The offset account means you can quickly take out funds when required very quickly. There are plenty of other tax strategies you could utilize, for example if you intend for your home to become an investment property in the future.
Just remember, you don’t always get something for nothing and potentially you might pay small fee or a higher interest rate for the offset account. Whilst this may be a deterrent for some people, for others this pales in comparison to the potential benefits. Whether or not you decide to use one will depend on your unique financial circumstances.
Feel free to call me or email to discuss if an offset account might be appropriate for you.