If you still have easy access to your additional repayments and you want to quickly repay your mortgage, then an offset account may be worth it.

What’s an offset account?

An offset account is a transaction account that is connected to your home loan and the money you deposit in it offsets the loan balance before interest is calculated. For example, if you owe $400,000 on your home loan and have accumulated $50,000 in an offset account, interest will be calculated on $350,000.

Benefits over regular savings accounts

If your offset account holds any surplus cash you can save interest at home rates, and no tax will be payable on the interest savings. In effect this is like ‘earning’ the home loan interest rate tax-free.

On the other hand, you could hold your surplus cash in a regular savings account but the interest rate you earn is usually much lower than what you pay on your home loan. Plus, every dollar in interest you make is taxable at your marginal rate, which could be up to 47%1.

Benefits over direct loan repayments

When additional repayments are made directly into the loan you can attain similar benefits to having an offset account. Nevertheless, limits often apply to the frequency and amount of withdrawals you are able make and withdrawal fees are typically charged. With offset accounts, you usually have ready access to the money via an ATM, cheque book and internet, and withdrawal fees are generally not charged.

The best of both worlds

You may decide to have your salary paid directly into an offset account and pull out money as required to cover living expenses. This may allow you to make the interest savings available with direct loan repayments and have easy access to your money. 

What interest rate is earned/saved?

Would interest earned/saved be taxable?

Would you have ready access to the money?

Cash account

Deposit rates

Yes

Yes

Direct loan repayment

Home loan rates

No

No

Offset account

Home loan rates

No

Yes

Other things to consider

·         You may want to make repayments directly into the loan if you’d prefer not to have easy access to your additional loan repayments. This will mean you are less likely to spend impulsively.

• Check with your payroll provider if you are able to credit your salary into an offset account.

• Some lenders may allow you to establish multiple offset accounts to help you better manage your cash flow.

• ‘Partial’ offset accounts are not as useful in saving you interest as an offset account which offsets 100% of the home loan interest rate. A number of lenders pay an interest rate on the balance of the offset account that is less than the home loan rate.

• Offset accounts can typically only be linked to loans with variable interest rates, not fixed rate loans.

• To maximise your interest savings you may wish to pay for the greater part of your living expenses on a credit card and pay back the card in-full prior to the end of the interest-free period. This allows you to use the credit card provider’s money to fund your living expenses, while applying your own funds to reduce your average daily loan balance.

• If you desire to invest some of the money held in an offset account, you should consider paying the money directly into your home loan and creating a separate loan to fund the investments. By taking out a new loan for investment purposes, the interest would usually be tax deductible.

1.     Includes the Medicare Levy.





General Advice Disclosure: This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, AMP Financial Planning and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.