Have you heard of an Offset account? An Offset account is a transaction account linked to your Standard Variable Rate Home Loan or Investment Home Loan. An Offset account can help you pay less interest and shorten the time it takes to pay off your mortgage.
Every dollar in your Offset account reduces the interest payable on the principal balance. Furthermore, the savings in your account will grow over time, allowing you to pay off your mortgage much faster.
How does an Offset account work?
For example, if you have a $400,000 Standard Variable Rate Home Loan with an interest rate of 6% and currently have $50,000 in your linked Offset account, you will only pay interest on $350,000. This is because every cent of the closing balance in your Offset account is used to reduce the balance you are owed on your home loan when calculating interest repayment. This means that the more money you have in your Offset account, the less interest you will pay, which helps you save and pay back the principal quicker.
Another great feature of an Offset account is that in case of an emergency, you can still access your money, as it is just like an ordinary everyday banking account. Although withdrawing your money can impact the amount of interest you are saving, it gives you great accessibility and flexibility.
Understanding the differences between a full Offset account and a partial Offset account
Full offsets provide the optimal advantage since they allow you to utilise your whole account balance to offset your loan interest. Differently, partial offsets permit only a fraction of the loan balance to be offset to reduce interest payments.
Benefits of an Offset account
Utilising your salary
With an Offset account, interest is calculated daily, therefore, the more money you have in your Offset account, the more interest you will save on your home loan. For example, every time you receive your salary you should consider putting it straight into your Offset account so that your balance keeps growing and interest will be reduced.
Be consistent with your saving
Aside from typical savings, you may deposit your annual bonus or any additional money into the account to lower the interest on your loan. While you do not receive interest, the interest rate on a house loan is substantially greater, giving you more value for your money. The funds can be withdrawn at any time without charge. Put any additional funds into the account to lower the interest payable and to create an emergency cushion.
Investors may receive tax advantages via offset accounts
Offset accounts are not generating interest and are therefore exempt from taxation. Ultimately, you may pay off your loan more effectively and avoid paying taxes on the money in the account. With this system, investors who are smart with their savings will be able to pay off the principal on their loan much faster, saving them further on interest payable.
Any advice given is general and should be evaluated considering your financial position, requirements, and goals.
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