What is an offset account?

Date Published: 2 October 2020

An offset mortgage is when you have one or multiple bank accounts allocated to your mortgage The money in these accounts lower the amount owed. Instead of earning interest on those savings, you pay less interest on your mortgage. 

How does an offset mortgage work?

In essence, it’s calculating your interest as if your savings had been used to pay down your mortgage while keeping the funds available when needed. 

You choose the amount of debt to be offset by the savings. For example, an offset mortgage account with $100,000 of debt would allow you to allocate up to $100,000 of savings towards your mortgage. Any savings above $100,000 won’t be counted against your mortgage or earn any interest so you want the savings in an offset account to be equal to or less than the debt.

Interest rates for debt allocated to an offset account are higher than debt under fixed-term. So generally the amount of debt you allocate to offset accounts should be similar to the amount you plan to have in your savings within the period of the mortgage.

Offset accounts don’t have to belong to the person who owns the mortgage. Often parents want to help with their children’s mortgage but gifting them money ties up funds that they may need as they approach retirement.  A good solution is for parents to nominate one or more savings accounts to offset against their children’s mortgages. The account is still in the parent’s names and accessible only by them so they haven’t lost control of their savings.

Unlike a revolving credit account in which your mortgage and savings are in a single account. With an offset mortgage, you can have multiple accounts. This is great if you like to keep your savings in separate buckets for various goals – a holiday, an emergency fund, a new car etc.

Is an offset mortgage a good idea?

If you have savings then almost certainly yes. 

While interest rates fluctuate, a general rule is by offsetting your mortgage with your savings you will save four times the amount of interest owed than what you would have earned in savings.

To put it into simple numbers, depending on interest rates $100,000 in a long term savings account (e.g a term deposit) could earn you $1,000 in interest. That same money in an offset mortgage account could save you $4,000 in interest owed*.

Given the above, a parent allocating their savings to offset their child’s mortgage gives the child a financial benefit much higher than the financial loss to the parent. A parent with $100,000 could save their children $4,000 per annum of interest payments, while only losing the opportunity of $1,000 in interest*.

Not only are you coming out ahead financially, but you also have access to your funds at any time you need. This gives you a lot more flexibility than term deposits or long term savings accounts where any withdrawal can result in surrendering any interest earned for the period.

When should I get an offset account?

You can choose at any point to reallocate offset debt as fixed-term debt. However, you cannot change fixed-term debt to be offset without incurring break fees. So the time to think about having offset accounts is when you are structuring your mortgage or when refixing.

Can I use an offset account for an investment property?

You can use an offset mortgage for both personal and investment mortgages. You should seek accounting advice as offset mortgages may impact tax deductibles. For this reason, if you have both a personal mortgage and an investment mortgage you would generally offset your savings against the personal mortgage.

In Summary

Offset mortgages are great if:

  • You have savings or plan to have savings within the period of the mortgage.
  • You like to allocate your savings into different ‘buckets’ for different purposes
  • You want to have access to your savings at any time.
  • Your parents or other benefactors are willing to forgo interest payments on their own savings to offset your mortgage.

Offset mortgages are not great if:

  • You tend to spend what you earn – remember, interest rates for debt in offset accounts are higher than fixed-term debt.
  • You don’t want to be able to access your savings – for some it is preferable to not have the option of spending savings.

*Numbers are indicative only and subject to interest rate fluctuations.

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