An offset account is essentially a transactional account linked to a home loan. The unique feature of an offset account is that the balance held in this account is offset against the outstanding balance of the loan before interest on the loan is calculated.
Here's how it works:
Let's say you have a mortgage of $400,000. If you also have an offset account with a balance of $100,000, the lender will calculate the interest you owe on your mortgage based on the difference between the mortgage amount and the balance in the offset account, in this case, $300,000. So, instead of paying interest on the full $400,000, you only pay interest on $300,000.
This can result in significant savings over the life of the loan, as the interest charged on the mortgage is lower. Moreover, unlike making additional repayments directly into the loan, money deposited into the offset account remains accessible to you. You can deposit and withdraw funds as needed, just like a regular transactional account. This flexibility is a key advantage of offset accounts, as it allows borrowers to reduce their interest payments while still maintaining liquidity.
Another benefit of offset accounts is that they can potentially shorten the time it takes to pay off a loan. Because the interest charged is lower, more of your repayments go towards reducing the principal amount of the loan. This can help you pay off your mortgage faster and save even more on interest in the long run.
It's important to note that not all lenders offer offset accounts, and those that do may have different terms and conditions. Some lenders may charge fees for offset accounts or require a minimum balance to be maintained. Additionally, the interest rates on loans with offset accounts may be slightly higher than those without, so it's essential to weigh the benefits against any associated costs.
In summary, an offset account is a powerful financial tool that can help borrowers save money on interest and pay off their loans faster. By linking a transactional account to a loan, borrowers can reduce the amount of interest they owe while still maintaining access to their funds.