How does an offset account work?

By YIP | 06 Aug 2020

While paying off your investment or home loan faster may not always be effective for tax reasons, there are some instances when it can save you thousands of dollars in interest. But how can an offset account help you do this?

Firstly, it’s important to understand how an offset account essentially works. Managing partner at Chan and Naylor, Graeme Salt, explained to Your Investment Property editor Sarah Megginson some instances when an offset account can yield real cash-saving benefits.

If you are aiming to pay down your mortgage sooner, Salt says, “You need to be diligent with your savings plan.”

“Offset accounts are one of the best ways of paying down your home loan. What they do is [act as a] savings account, which the balance is offset against the actual loan,” he explains.

“So, let’s say you have a $500k and $100k in your savings account, the bank says, ‘Well, you total that, it’s $400k. We’ll only charge you interest on the $400k on actual balance.’ So, that can be a very powerful thing for the end date of the home loan. You might be signed up to a 30 year loan term, but you might pay it off in only 25 years when you’re being charged less interest.”

With every cent making a difference, Salt encourages his clients to have their income drop into an offset account and to fund their everyday expenses with a credit card.

They can then pay off the credit card in full each month.

“Again, the money stays in that offset account and then at the end of the month, the offset account is what is used to pay for the credit card,” he shares.

For more information on how offsets work, and other finance hacks, click here.

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