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Having an offset account that’s linked to your home loan can be a useful feature to access while you’re paying off your mortgage, but there are a few things to understand before you open one.
It’s a bank account that’s linked to your home loan, and from which you can make transactions. Offset accounts are usually associated with variable rate home loans, as opposed to fixed rate home loan products.
The key to an offset account is that lenders deduct the amount of money sitting in your offset account from the loan principal when determining your interest repayments.
So, if you’ve got $500,000 to pay off on your home loan and you’ve put $10,000 in your offset account, then you’ll be charged interest on $490,000 on your home loan.
Offset accounts work as a standard transaction account where you can make payments and withdrawals as you would with your debit card.
Using an offset account can be a helpful way to reduce interest on your home loan repayments. It can also depend on the type of offset account you choose.
This can generally be used for either variable or fixed rate home loans.
For example, think about that $500,000 home loan we mentioned earlier. If you put $10,000 in a 50% partially offset account, then you would pay interest on $495,000 of your home loan.
This is more commonly used for fixed rate home loans.
By doing so, the Australian Taxation Office typically won’t tax you on the interest you save in this situation. This is because money in your offset account does not earn interest, and is therefore considered non-taxable.
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These are both common features of home loans, but there are some key differences that may suit you better than others:
You can generally get a little more bang for your buck in an offset account, because the interest rate on your home loan repayments tends to be higher than the interest you would earn in a standard savings account.
The interest you’d save by using an offset account won’t actually be considered as income, which means you won’t be taxed on it. Interest that you’d earn on a savings account is usually considered income, and means it can be taxed.
Yes, you can! You can start by comparing home loans with iSelect and Lendi and see if you can find a home loan with features that suit you.
At iSelect we’ve partnered with Lendi to make it easier to find a great deal on your home loan*. Click here to get started comparing from a range of lenders online, or give Lendi a call on 1300 186 260.
Last updated: 6/12/2021