What is a mortgage offset account?

With interest rates on hold at all-time lows since August last year, the financial institutions are starting to trot out cut-price fixed rate mortgages with some useful bells and whistles.

In early July, Adelaide Bank announced a brand new three-year fixed rate mortgage of 4.89%, which comes with a 100% offset facility. Put simply, a 100% mortgage offset is a savings account linked to a home loan and is a tax-friendly way of putting savings to work by reducing interest liabilities.

By way of explanation, let’s assume a homeowner has a mortgage of $400,000 and savings of $40,000. With a 100% mortgage offset, a homeowner, in this instance, will only pay interest on a balance of $360,000($400,000 – $40,000). The upshot is that by having a decent amount of money in your offset account, you can effectively cut years and thousands of dollars from your home loan.

From a practical point of view, offset accounts are more flexible than say a regular redraw facility attached to a home loan, as many provide ATM access, which lets you withdraw money at any time without additional charges. However it’s important that you discipline yourself to limit your spending, so you don’t dip too far into your savings.

A 100% offset is not only a great way to rock the mortgage boat in your favour, but it also comes with some clever tax benefits.

As far as the Australian Tax Office (ATO) is concerned, you have not received interest on your cash savings held in an offset account. As a consequence, this interest is not added to your taxable income. This means you’re getting the full benefit of the interest accrued on your cash, yet you won’t lose almost half of this return to the ATO if you’re paying tax at the top marginal rate.

Despite the many benefits, a mortgage offset facility is not for everybody and instead, borrowers with a small amount of savings may be better off applying for a basic mortgage with a lower interest rate. It’s a case of doing your sums to make sure that the offset facility is worth your while and isn’t costing you money.

If you need more information about the benefits of a mortgage offset account, contact John Stamatakis on 0431 560 448

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