Many financial advisers encourage the use of offset accounts for tax reasons. . If you want to claim a tax deduction on the interest, then most accountants will advise you not to put your money in and then withdraw unless they are used for tax purposes.
An offset account helps you save interest on your home loan without having to pay the fund into the actual loan. The offset account is separate to the loan, but still linked so you are able to hold your money there to save on interest, but you can still withdraw the money if you need it for other expenses. For example, if you have a $400,000 home loan and you deposit $50,000 into the offset account, then these funds will reduce the loan amount chargeable by interest to $350,000. If you chose to redraw the $50,000 later on, the balance would return to $400,000 and you will be charged interest on that amount.
One of the benefits of having an offset account is that it is suitable whether you are a saver or spender. If you find that you have trouble keeping money in your account, you can have your wages paid directly into the offset account and as interest is charged daily, the money that is deposited will have an instant impact.
On the other hand, if you are a spender, you may find that you will earn less interest using a savings account compared to the amount of interest you would save on your home loan by using an offset account. Also, not only will you not be taxed on the interest you earn, but it will build up equity in the property.
When shopping around for a home loan, research what options are available for offset accounts and whether the lender has any fees or restrictions. Some lenders may have a minimum transaction account and withdrawal fees if you take out money. You need to be wary that these fees don’t end up costing you more than the interest you would save. Speak with the lender about how the offset account functions.
Before deciding on a home loan, speak to your lender and financial adviser about whether it will suit your circumstances.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
