You might have heard of a mortgage offset account since they’re commonly used to pay off home loans earlier.
If you’re an investor, this simple but powerful tool can help you free up cash for deposits, earn equity faster, and leapfrog into multiple properties.
It’s crucial to consider how an offset account fits into your financial situation, especially in terms of interest rates, fees, and the balance you maintain, to truly benefit from its potential.
Offset accounts are a gold mine for investors because you can potentially:
- Save thousands on your mortgage’s interest charges
- Pay off your mortgage years earlier, which unlocks equity sooner
- Gain more value than earning interest in a savings account
What’s most surprising about offset accounts is that they’re typically free.
So, let’s look at how these accounts work and the benefits for investors.
Just note, this is general advice and you should consult with a financial advisor for specific advice.
How a Home Loan Offset Account Works
An offset account is a personal savings account that sits beside your investment mortgage and lowers the interest calculated by your bank.
For example, if you have a $500,000 loan and $100,000 in your offset account, you only pay interest on $400,000 of your mortgage.
You can shave years off the life of your loan simply by using the offset account as both an everyday bank account and an everyday transaction account, where you deposit your salary and manage daily financial activities such as paying bills.
This approach not only simplifies your finances but also maximszes the interest savings on your mortgage.
Some people choose to offset their personal home loan with their savings and income, and park “windfall money” in their investment property’s offset account, or a combination of both.
An offset account can be linked to an investment loan in the same way, but has benefits beyond paying off your loan earlier.
Its functionality mirrors that of a regular transaction account, allowing for deposits, withdrawals, and the use of a debit card for everyday transactions, highlighting its versatility in managing daily finances.
Saving on Interest with an Offset Account
Linking an offset account to your investment loan will reduce the amount of interest you’ll need to pay each year, directly impacting the interest you pay on your home loan compared to higher interest rates like those on credit cards.
Lowering your interest payments when interest is a tax-deductible perk might seem counter-intuitive. Typically though, using an offset account gives you a greater net saving.
Let’s say you own a $500,000 investment property. At 7% p.a., you would pay around $35,000 interest in 12 months. If your marginal tax rate was 32.5%, your tax deduction would be around $11,375.
Total out-of-pocket expenses: $23,625 ($35,000 – $11,375 = $23,625)
Now let’s say you had $100,000 in an offset account linked to your investment mortgage. You would only be charged interest on $400,000 of your loan, totaling $28,000 in 12 months.
Assuming a 32.5% marginal tax rate again, you could deduct around $9,100.
Total out-of-pocket expenses: $18,900 ($28,000 – 9,100 = $18,900)
An offset account might reduce the interest you can claim, but you’re also paying significantly less interest overall. In this scenario, you would save $4,725 in 12 months using an offset account.
If we use this same example and assume you keep $100,000 offsetting your investment loan at 7.5% p.a., it reduces from a 30-year loan to 20 years, and you could save $454,000 in interest.
Reducing interest each year and creating equity faster is one way investors are using free offset accounts to build a bigger portfolio faster.
Keeping more money in your offset can significantly reduce the loan term, allowing you to pay off the loan sooner and save on interest over time.
Bear in mind, this example doesn’t factor in personal circumstances, so it’s always best to see a tax professional or financial advisor for advice that suits you.
3 Tips for Maximising Your Offset Strategy
To effectively pay off your home, you can take full advantage of your offset account using some smart tactics.
#1: Deposit all income into your offset account
Every dollar, every day, helps save money because loan interest is calculated daily. Deposit all income into your account, including your rental income. Even if the rental income is used to pay off the mortgage and your property manager, offsetting the extra cash for even a week or two makes a difference.
#2: Use a credit card with interest-free days for everyday purchases
Instead of drawing from your account daily, you can use a credit card with 44 or 55 days interest-free and pay it off in full when the statement is due.
By the end of the month, you could have thousands of extra dollars reducing your mortgage interest. The caveat is that you must be able to pay off the card in full, otherwise interest charges on your purchases will undo your hard work.
Look for cards with low or no annual fees and cashback incentives.
Get ready to leverage your savings
Track your property values and remaining loan amounts to calculate when purchasing the next property is feasible.
You’ll be consistently saving on interest, earning equity faster, and freeing up the borrowing power that can open the door to leverage each next investment.
What About High-Interest Savings Accounts?
Typically, the interest rate on a loan – especially investment loans – is much higher than the rate applied to savings accounts.
For instance, a high-interest savings account might earn 5.5% on your balance, but a home loan charges 6.3% p.a.
You’ll likely save more on interest by offsetting your loan than you would earn by putting all your cash into a savings account.
Why Not a Redraw Facility Instead?
A redraw facility lets you store your savings inside your mortgage and draw from it like a bank account. It operates much like an offset account and works well for personal home loans.
However, if you redraw from an investment loan for any private purpose unrelated to your property, you need to apportion the interest charged on the loan into deductible and non-deductible parts. It can quickly become a tax nightmare that the Australian Tax Office suggests avoiding.
How to Set Up an Offset Account
An offset account is a ‘transaction account linked’ to your home loan, offering flexibility in managing your finances.
Chances are, your bank already has an offset facility. You can easily set up an account over the phone or at your local branch.
If your bank doesn’t offer offset accounts, you’d need to switch your loan to a provider that does (which can also be a great opportunity to lock in a better interest rate).
Understanding the difference between a full and a partial offset account is crucial. A partial offset account means only a percentage of your account balance is offset against your home loan, unlike a 100% offset account where all the money in the account is offset against the home loan. This distinction can significantly affect how much interest you save over the life of your loan.
You can access your offset account via your bank’s app and shuffle money between accounts instantly. It’s an easy way to see where your money is working best between your loans, offset accounts, and credit cards so you can hit your investment property goals faster.
FAQs About Mortgage Offset Accounts
Is a mortgage offset account a good idea?
Yes, an offset account is beneficial because it reduces the interest you pay on your home loan while still giving you access to your cash.
What are the disadvantages of an offset mortgage?
Offset mortgages often come with higher costs, including higher interest rates and additional bank fees compared to other loan types.
Can I offset 100% of my mortgage?
Yes, with a 100% offset account, every dollar in the account offsets the interest on your home loan, and these accounts are usually more common with variable rate loans.
How does an offset mortgage work Australia?
In Australia, an offset account is linked to your home loan and works like a regular transaction account. However, the balance in your offset account reduces the interest charged on your home loan.
