Here's a run down for the people who've asked what an offset account (OA) is or why we use one instead of transferring $ straight to our home loan . An OA is a transaction account linked to your home loan. You can make deposits/withdraw from it as you would with a regular transaction account. Sounds pretty boring right? Well, the awesome thing about them is that when you hold money in an OA over a period of time, you can reduce the amount of interest charged on your home loan. The higher the balance and the longer the period, the less interest you'll pay. And this could help you pay off your loan sooner!! The bank calculates your interest off the NET of the 2 accounts so if your mortgage was $400k & your OA has $200k then interest is only calculated on $200k!! See next pics for examples ️ . WHY WE USE ONE: But why don't we just pay all our $ straight onto our mortgage and not have an excessive amount of cash sitting in an OA? The answer was made simple to us by our home loan T&Cs (have you read yours?). . A fixed rate, up until last year, was better than the variable rate offered to us. So lock us in Eddy! BUT our mortgage agreement says we can only pay an excess $20k into our mortgage per year while on a fixed rate. BUMMER! Generally speaking, the offset feature is only available on variable rate home loans, however, our provider offered us a 100% unlimited offset feature. Problem solved! . Another reason is to do with tax deductions. We weren't always certain if this house would be a rental one day. If we didn't use an offset feature & instead redrew all our available cash from the mortgage to buy a primary residence, then the interest we can claim at tax time is on the original outstanding mortgage balance...not the new larger mortgage balance after withdrawing. Meaning less interest deductions at tax time . CONS: OAs can come with yearly or monthly fees. Or, in our case, a slightly higher interest rate! For us, paying a slightly higher rate to have our unlimited offset saves us much more interest than the rate costs us in interest. . Hope that explains why we are doing what we're doing!!
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