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Looking for ways to pay off your mortgage in record time? Whether you’re a seasoned investor or buying your first home, an offset loan can help you reduce interest payments, save on tax and pay your mortgage off years ahead of schedule.

What is an offset loan?

With an offset loan (also called an offset account, interest offset account, mortgage offset account or offset home loan) the borrower takes out a home loan and opens a linked savings or transaction account. The balance in the savings account is then ‘offset’ daily against the home loan.

How an offset loan works

With an offset loan, instead of receiving interest on your savings account each month, the account balance is offset against your home loan, reducing the amount of interest you pay over the life of the loan. For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your home loan is calculated on $380,000 instead of $400,000.

While your repayments remain the same, you’re paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan.

For home owners, another potential benefit is that the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, which means you may not have to pay tax on any interest earned on your savings. Seek advice from an accountant or financial planner on the tax implications of an offset account.

Getting maximum benefit from an offset loan

Because your mortgage interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan. You can still access the money in your offset account online or with an ATM card, but because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible.

Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you’re not a disciplined spender you may end up incurring interest charges and cancelling out the savings benefit.

What you need to know about offset loans

An offset account is identical to any other savings account with a bank card and online access, so you can withdraw your money at any time. In most cases the offset is tax free (but do consult your tax accountant) Most offset accounts are offered with variable rate loans, however some lenders offer offset accounts on fixed rate loans, too.

The upshot?

Many borrowers could benefit from having an offset account, particularly if you plan on refinancing or moving home in the near future. It’s worth talking to your broker to find out more about the best option for your circumstances.

Happy reading - and feel free to share with anyone who may find this info useful.

Jamie

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If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. 



 

The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.

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A question I’m constantly asked and one that appears on a lot of property investing forums is “what is the difference between a redraw facility and an offset account?”

The fundamental difference is that “redraw” is when you’ve paid extra money into your home loan and you’re able to “redraw” those funds back out of the loan. An “offset” account is a bank account linked to your home loan. You can place money into this account – and take it out.  The money that sits in the account saves you interest on your home loan.

Most variable loans come with the ability to redraw.  To be able to use a redraw facility, you need to make extra repayments in addition to your minimum loan repayments. Fixed loans aren’t usually as flexible as variable loans – and it’s often the case that you can’t redraw or make unlimited extra repayments into these loans.

An “offset” account is a bank account which is linked to your home loan. Instead of earning interest on the money sitting in your offset account (as you would a normal bank account) – you reduce the amount of interest you pay on your mortgage by having funds sitting in your offset.

So for example – if you had a $200k mortgage with $10k sitting in your offset account – you would only pay interest on $190k (take the $200k mortgage and subtract the $10k sitting in your offset).

Offset accounts are generally only available for variable loans. However – there are a small number of lenders who allow a fixed loan to be linked up with an offset.

So all in all – “redraw” is a feature of a loan whilst an “offset” account is a bank account linked to your home loan.

What implications does using a redraw facility or offset account have with property investors?

The biggest issue is that some borrowers “redraw” funds from an investment loan – which can be a big no no! When redrawing funds – the tax man may consider those funds as “new borrowings” which means that they’d only be deductible if used for investing purposes.

Offset accounts don’t present the same issue – you can generally transfer money in and out of an offset without the same taxation implications.

As always – seek professional advice from a qualified tax accountant on your specific scenario.

Jamie Moore

About the author: Jamie Moore is an active residential property investor and owner of Pass Go Home Loans. If you’d like to have Jamie provide advice on your finance structure and investment strategy, simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service.

This information is of a general nature – please always consult taxation professionals about the specific nature of your situation.

Pass Go Home Loans Pty Ltd
Canberra, Australia
This email address is being protected from spambots. You need JavaScript enabled to view it. | www.passgo.com.au | 1300 656 299

 

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