Debt Management: Consider an offset bank account.
If you want to repay your mortgage quickly and still have easy access to your additional repayments, an offset account may be worth using.
What’s an offset account?
An offset account is a transaction account that is linked to your home loan and the money you deposit in it offsets the loan balance before interest is calculated. For example, if you owe $400,000 on your home loan and have accumulated $50,000 in an offset account, interest will be calculated on $350,000. What better way to improve efficency through effective debt management.
Benefits over regular savings accounts
If you hold your surplus cash in an offset account you can save interest at home loan rates, and no tax is payable on the interest savings. This is effectively like ‘earning’ the home loan interest rate tax-free.
Alternatively, you could hold your surplus cash in a regular savings account but the interest rate you earn is usually much lower than what you pay on your home loan. Plus, every dollar in interest you earn is taxable at your marginal rate, which could be up to 47%1.
Benefits over direct loan repayments
When you make additional repayments directly into the loan you can achieve similar benefits to having an offset account. However, limits often apply to the frequency and amount of withdrawals you can make and withdrawal fees are usually charged. With offset accounts, you typically have ready access to the money via an ATM, cheque book and internet, and withdrawal fees are generally not charged.
The best of both worlds
You may even want to have your salary paid directly into an offset account and withdraw money as needed to meet your living expenses. This can enable you to make the interest savings available with direct loan repayments and have easy access to your money.
To discuss your debt management, contact Craig at HQB Financial Solution.
|What interest rate is earned/saved?||Would interest earned/saved be taxable?||Would you have ready access to the money?|
|Cash account||Deposit rates||Yes||Yes|
|Direct loan repayment||Home loan rates||No||No|
|Offset account||Home loan rates||No||Yes|
See the full article offset accounts