When it comes to choosing a mortgage, evaluating all the available options can be a daunting and stressful prospect, particularly for first time buyers – however if you’re looking to save years and thousands of dollars off your home loan, you might want to consider a mortgage offset account.
As its name suggests, an offset account offsets the balance in that account against the balance of your home loan, which means you pay less interest. Over time these savings can add up significantly, leading to a reduction in the time it takes to pay off your loan.
For example, if you have a home loan balance of $300,000 and have $20,000 in your offset account, you’ll only pay interest on a loan balance of $280,000. As home loan interest is calculated daily, every cent in your offset account can reduce your home loan interest daily.
Furthermore, the offset account is set up so that it matches the interest rate of the mortgage, meaning interest earned in the account will also offset the mortgage interest – leading to further savings of which are completely tax-free.
Attractive to Investors
This scheme can also be attractive to property investors, who can reap significant tax benefits by taking out an interest-only loan with an offset account.
Interest-only home loans with an offset facility allow investors to reduce their monthly repayments, minimise their non-deductible debt (and increase deductible debt), as well as securing a good return when purchasing a principal place of residence (PPR) and converting an existing home into an investment property.
Furthermore, taking out an interest-only loan with an offset account can be an effective tax strategy if you have the financial discipline to make regular extra repayments into the offset account, thus reducing the amount of interest payable on your mortgage.
What are the benefits of using an offset account on an interest-only loan?
Lower repayments: Paying the interest-only portion of the loan means periodic repayments will be lower, freeing up cash for other investments.
Tax deduction: A tax deduction can be claimed for interest paid on a property if it is clear that the purpose of the loan is for investment purposes. To claim the interest as a tax deduction, focus on reducing the interest payable on the non-deductible debt.
Separation of debt: An interest-only home loan allows the original debt to be kept separate, meaning savings can be placed into an offset account against any debt that’s not tax deductible.
Contingency buffer: An interest-only mortgage with an offset facility effectively provides a contingency buffer to cover unexpected costs or a lifestyle change, i.e. turning a home into an income-producing asset.
How to set up this structure
Before taking out a loan with an offset account, it’s important to work with a savvy mortgage broker, financial planner or tax specialist to evaluate your financial position. Identify the amount that you can afford to put into the offset account each month and discuss your investment strategy with them to see whether this structure will allow you to meet your financial goals.
For some free financial advice, get in touch with one of our experienced ChapterTwo consultants today.