An offset account is an account for your home loan which is usually our savings or transaction account. Based on your offset accounts savings, you will only be charged the interest depending on the difference between the total amount loaned and the offset amount. With this offset account affecting the total amount of interest, you can pay less by having the right amount in it. Having an offset account can reduce the amount total interest paid as well as the length of the period or term which was agreed for it to be paid.
Most of the time offset accounts are uses for variable rate home loans and sometimes a split home loan to start with. Having the variable rate loan may allow you the option of having a 100% offset account and in some cases, having a split home loan can be the start of your plan where you can later on have a lower rate when it comes to changing to a variable rate home loan.
What Is An Offset Account Used For
The offset account is used to be able to save an amount and avoid paying a lot of interest. Keeping holdings in your offset account will reduce the amount of total interest you will pay as long as you keep the balance in your offset account.
An example would be the following:
If you take a $150,000 from your home loan and deposit $10,000 into your offset account, you will need to pay interest for only $140,000 instead of the full amount of $150,000 but you will have to keep the $10,000 in your offset account for this to be accepted.
The first and main advantage is that you will be able to save a lot of money since you will be paying for less interest and this can result in you saving thousands of dollars. Since the offset account works like a normal transaction account, you may freely withdraw and deposit whenever you want provided everything is in order. This way you have more control over the money you withdraw, deposit and need to pay later on.
This is a very good option if you plan on going for a variable rate home loan as you will have the opportunity to use the loan in order to adjust to the fluctuation of interest if necessary. It is a good source of currency which does not have a high impact on repaying and finances after.
A disadvantage for offset account is that most of the time they will be offered variable rate home loans which may come with high interest rate if the owner of the account has a formidable amount of savings already. When this happens the amount that is to be paid may go over the intended savings planned out by having the offset account and when cash rate fluctuations occur at the wrong time, some offset accounts may be unready for such circumstances.
Having full details and planning ahead before using an offset account for your loans and purchases is wise and it is important to know how it works. The offset account may be useful for some people but not everyone, a lot of checking and planning out is important to avoid any issues.
Offset accounts can be useful in particular when managing investment vs personal use of funds. DPS Accounting Solutions recommends that you get specific advice from your accountant before setting up an investment loan to ensure the loan and offset accounts are setup correctly to ensure you maintain tax deductibility on the debt.
Offset accounts can be very useful but tricky for those who are unaware of the way they work. It is best to make sure you understand how they can help you avoid paying for high interests and how to properly access the account. If you plan on applying for a variable rate home loan, you can consider using an offset account to save more which can later on be very beneficial to you. Speaking with an expert on how offset accounts work and what way you should use them may help you understand more and may even help you plan out when and how you will use the offset account. In the end, you will be able to save a substantial amount of balance when using an offset account instead of ending up paying a hefty amount based on your home loan.