What is an Offset Account

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There is a lot of confusion regarding offset accounts. They are often confused with all-in-one accounts or accounts where you salary is paid into the loan. While in this aspect the functional outcome is the same there are other important differences which can have vital tax implications.

However anyone who tells you that an offset account will let you pay off your mortgage more quickly, is peddling a half truth. Apart from important tax implications in one very specific area, there is no intrinsic advantage of an offset account over an all-in-one account, a line of credit or even a basic account with salary crediting and unlimited free redraw.

In fact when it comes to saving money in some circumstances these types of loans can have the opposite effect. For example:

  • if you pay a higher interest rate or high monthly or annual fees the benefit may be reduced or nill.
  • If you lack discipline these facilities give you easy access to your funds and when linked to a credit card can easily erode your equity.
  • Of course if you are on a low income your modest dicscretionery balance is unlikely to make any significant contribution.

So how does it work? In addition to your home loan, you have a linked transaction account usually with cheque and ATM access. You deposit your income into the transaction account and use it for all your daily expenses. Any money in this account is offset against the amount owing on your home loan and you only pay interest on the outstanding net balance. So say, for example, that you have a home loan of $250,000 and you have a balance of $10,000 in your transaction account, you only pay interest on $240,000. Interest is calculated on a daily basis. 

The major and most significant difference is in the way the ATO treats an offset account - and if think you may at some time in the future consider renting out your primary place of residence - get this right before you start or it will cost you maybe 10's of thousands.

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