In recent years, offset home loans have become progressively available and, in turn, they are becoming increasingly popular amongst home owners.
But what is an offset home loan and is it right for you?
What Is an Offset Home Loan?
An offset account is a transaction or savings account which is attached to your home loan or mortgage. The money you deposit into this account is offset against the balance of your home loan, meaning that the amount of interest payable on the outstanding mortgage is reduced.
What are the Benefits of an Offset Account?
1. They are Flexible and Accessible
Offset accounts are more flexible and provide more accessibility than regular mortgage accounts. As an offset account is set up like a regular savings or transaction account, you have the flexibility to deposit as much or as little money into that account as you wish – and as frequently, or infrequently, as you wish.
Equally, you can withdraw funds from the account as often as you like. There is no limit to the amount you can withdraw, or how frequently you can do so.
This means that while you may choose to transfer funds into your offset account on a regular basis, those funds are not locked away. Should the need arise, you can easily access that money.
2. You Save Money on Interest
As the funds held in the offset account are offset against the balance of your mortgage, it means that you pay less interest on your mortgage or home loan.
For example, if you had a home loan balance of $500,000 and held $100,000 in your offset account, you would only pay interest on the home loan balance of $400,000, rather than the full $500,000.
Also, you will usually find that the savings you make on your home loan interest repayments are substantially more than the interest you would earn if that money were deposited into a savings account.
Not only will your periodic loan repayments be lower, but over time, the money you save on interest will really add up – and this can reduce the length of time in which it takes you to pay off your mortgage, or free up more cash for other investments.
3. You Reap Tax Benefits
With a savings account, while you can earn interest on the money deposited in this account, the interest is often nominal – and it is also taxable.
By depositing money into an offset account as opposed to a savings account, you are saving on the tax which you would otherwise have to pay on the interest earned from your savings account. This is particularly beneficial to owner-occupiers who are not eligible for tax deductions on interest.
For property investors, the tax implications of an offset account are particularly advantageous. Providing that the purpose of the loan is specifically – and demonstratively – to fund the investment property, you can claim a tax deduction on the interest you pay on the loan for your investment property.
Many savvy property investors therefore aim to maximise the interest payable on their investment loan, which in turn enables them to maximise their tax deduction. They will also aim to minimise the interest payments on their principal residence or owner-occupied loan (which is not tax deductible).
With a standard mortgage account, if an investor were to deposit additional funds into their loan account (in order to reduce interest payments), and then later withdraw those funds for another use (such as buying a car or a boat), they could inadvertently change the purpose of the loan. This would limit their ability to claim the interest on that loan as a tax deduction.
With an offset account on the other hand, the purpose of the loan will not be affected by any deposits or withdrawals being made. This gives investors more flexibility with their money without the risk of losing the tax deduction on the interest of the loan.
While an offset account offers many advantages, it’s not for everyone and you should seek independent financial advice before proceeding. For investors, a reputable property investment company will be able to explain the various options open to you and devise an investment strategy best suited to your individual circumstances.
Please note that this article is does not provide financial advice and must not be relied upon as such. The information provided is intended only as a guide.
Author Bio: Felicity Allen writes for property investment consultancy Momentum Wealth. Offering market leading research and advice on the Australian property market, the company helps clients accelerate their wealth through property investment by assisting them in the strategic planning, financing, acquisition, management and development of their commercial and residential investment properties. You can catch Felicity on LinkedIn and Google+.