Imagine having a magical piggy bank that helps you pay off your home loan faster. That’s essentially what an offset account is! It's a savings or transaction account linked to your mortgage, and the balance in this account offsets the amount you owe on your home loan.
Here's how it works: If you have a $500,000 mortgage and $50,000 in your offset account, the bank will only charge you interest on $450,000. Pretty nifty, right? It’s like having a sneaky sidekick in the battle against your home loan.
Why do you need one?
Save on interest: The most obvious benefit. The more you have in your offset account, the less interest you pay. It’s like giving your bank a little less money every month. And who doesn’t like that?
Speed up your loan repayment: Since you’re paying less interest, more of your payment goes towards reducing the principal. This means you could potentially pay off your mortgage years earlier. Think of all the vacations you could take with that extra cash!
Flexibility: An offset account is a bit like a financial Swiss Army knife. You can access your money whenever you need it. Whether it’s for an emergency or a spontaneous splurge, your funds are there, working hard to reduce your mortgage while being easily accessible.
Tax benefits: Interest earned on savings is taxable, but money in your offset account isn't earning interest; it's reducing your mortgage interest. So, it’s a clever way to make your money work harder without attracting the taxman’s attention. Also, mortgage interest rates are generally higher than the interest rate paid on savings accounts, so the offset account effectively provides a higher interest benefit without any tax payable. Neat huh?
Investment properties: If your home might become an investment property someday, an offset account is even more beneficial. By using an offset account with an interest-only loan, you keep your loan balance high, maximising future tax deductibility. If you later convert your home to an investment property, the accumulated funds in the offset account can be used for a new purchase, while the interest on the original loan remains fully deductible. Quick disclaimer: be sure to speak to your accountant to confirm the deductibility of any interest and property expenses of an investment property for your circumstances.
Okay, so… having an offset account really is like having a superhero sidekick for your mortgage. It saves you interest, helps you pay off your loan quicker, and offers flexibility. Why wouldn't you want one? It’s a no-brainer, really. Get yourself an offset account and let your money do some heavy lifting!