
Essentially it is a bank account that by depositing your surplus funds into this account offsets the interest on the same amount in your mortgage account. Let’s say you have a mortgage of $500,000 and $100,000 in your offset account, the bank will only charge you interest on $400,000 on your mortgage.
What do I need to know about offset accounts?
Glad you asked. There are a number of considerations to take into account.
Not all banks offer 100% offset accounts, meaning that the interest rate of the mortgage is higher than the interest from the offset account. Some banks also charge a higher interest rate or additional fees on loans with an offset facility, so it is worthwhile checking with your bank first or find a bank that offers 100% offset without any additional fees or higher mortgage interest rates – shopping around pays.
What are the options?
If you would put your surplus funds in a savings account – you would get next to no interest at all and the interest you would earn would be taxed at your marginal tax rate eroding your pitiful investment return even further.
So you say “well, then I use the surplus funds to pay my mortgage off faster”. You are right, you could do this, but if the money is in an offset account, you can use these funds at any time for another purpose such as buying a car or renovating the home. Then, you say “well, I can do this as well by having a mortgage with a re-draw facility”. Right again, but apart from banks having the ability to reduce your re-draw amounts, as recently highlighted by ME Bank, there are some differences in the tax treatment between offset accounts and re-draw facilities.
So, where is the advantage?
Let’s say you are renting but have a mortgage on an investment property of $400,000 and over the past few years managed to pay off $50,000 more on the mortgage than required. Let’s say you now want to take that $50,000 and use it for a deposit on the property you intend to buy and live in.
Investment Loan with re-draw facility | Investment loan & | Offset Account | |
Loan Balance | $400,000 | $450,000 | $50,000 |
The difference is that the loan with the offset account are essentially two different accounts, whereas the loan with the re-draw facility is a single account. If you are re-drawing the $50,000 you are re-borrowing the money from the bank and increasing the loan balance. If you are re-drawing the money for a private purpose such as using the funds for a deposit on a home to live in, the interest on the $50,000 you re-borrowed is not tax deductible.
On the other hand, if you take the money out of the offset account and use it for the same purpose, the additional interest you are paying on your investment mortgage is tax deductible. This is because the loan balance was never reduced in the first place only the interest on the loan was offset.
This is the same if you own your own home (no mortgage – you put all your surplus funds – say $200,000 – over the past 10 years into it) and then decide to move interstate and want to rent the original home. The mortgage on your new home is not tax deductible and because you paid off the mortgage on your old home the rental income is most likely far greater than the expenses without any loan interest. If you would have put all your surplus funds in an offset account with your original mortgage, you could now take the $200,000 out of your offset account and use it as a deposit on the next home and at the same time the interest on the $200,000 you would still owe on the original home would now be tax deductible.
So, whether you are paying off your own home or an investment property, having an offset account in place creates greater flexibility in the future on how to use your surplus funds and creates tax advantages as well. Important however is that your bank does not penalise you for doing so as this would erode these advantages.