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Offset accounts: managing your mortgage

If you want to repay your mortgage quickly and still have easy access to your funds an offset account is worth using.
An offset account is a transaction account that is linked to your home loan and the money you deposit in it offsets the loan balance before interest is calculated. 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.
If you hold surplus cash in an offset account you can save interest at home loan rates, and no tax is payable on the interest savings. This is effectively like ‘earning’ the home loan interest rate tax-free.
Alternatively, 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. Every dollar in interest you earn is taxable at your marginal rate, which could be up to 49%*.
When you make additional repayments directly into the loan you achieve similar benefits to having an offset account. However, limits often apply to the frequency and amount of withdrawals you can make and withdrawal fees are charged. With offset accounts you have ready access to the money and withdrawal fees are generally not charged.
You should have your salary paid directly into an offset account and withdraw money as needed to meet your living expenses. This enables you to make the interest savings available with direct loan repayments and have easy access to your money.

Other things to consider

If you’d prefer not to have easy access to your additional loan repayments, you may want to make repayments directly into the loan where you are less likely to spend the money impulsively.
Some lenders allow you to establish multiple offset accounts to help you better manage your cash flow.
Offset accounts can usually only be linked to loans with variable interest rates, not fixed rate loans.
To maximise your savings pay for your living expenses on a credit card and repay the card in-full before the end of the interest-free period. This enables 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 want to invest some of the money held in an offset account, you should consider paying the money directly into your home loan and establishing a separate loan to fund the investments. By taking out a new loan for investment purposes, the interest would usually be tax deductible.

To find out more, contact Andrew Fortelny on 93841195.

* Includes the Medicare Levy and Temporary Budget Repair Levy.

Important information and disclaimer

This publication has been prepared by Andrew Fortelny, Yellow Brick Road Coburg
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.
Information in this publication is accurate as at the date of writing, In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee, nor their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

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