Offset Account Home Loans

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Offset Account Home Loans

By: Mozo

What is an offset account home loan?

Offset account home loans are home loans that includes a transaction account. The account is directly linked to the home loan. The balance of the account is "offset" against the sum of your home loan. You are only charged interest on the balance of the home loan minus the amount in the offset account, rather than on the entire sum you owe on the home loan.

For example, suppose that you have a $200,000 home loan at an interest rate of 8%. You currently have $10,000 in your offset account. The $10,000 is subtracted from the outstanding balance on your loan ($200,000), and you are left with $180,000. You will be charged interest based on $180,000 rather than $200,000. That means the interest on your home loan is 8% of $180,000 ($14,400) rather than 8% of $200,000 ($16,000).

An offset account works like a normal transaction account. To gain the most benefit, you can have your salary deposited directly into your offset account. You can then access your money from ATMs, bank branches or through cheques.

There are two types of offset account home loans – Full Offset and Partial Offset accounts. When compared against each other, full offset accounts provide the most benefits. With a full offset account, the same interest rate as that of your home loan is applied to the balance of your savings account. Like the example above, that means you are earning the full 8% home loan interest rate on your offset account balance.

With a partial offset account, a lower interest rate is paid on your account balance, say 6% for example. It still helps to reduce the balance of your home loan for interest calculation purposes, but to a lesser degree than a 100% offset account.

What are the benefits?

Offset accounts help you save money throughout the term of your home loan, meaning you can pay off your home loan faster. Despite the fact that your interest is calculated on the reduced amount, your monthly payment is still based on the full amount owed on the home loan. You're effectively making a larger payment towards the principal of your home loan, meaning you pay off your loan faster.

With a standard savings account, you would have to pay taxes on the amount of interest you earn. Offset accounts on the other hand, do not require any taxes to be paid, as the interest earned is not counted as taxable income.

What are the drawbacks?

Offset account home loans have many benefits, but there are can also be some downsides to them. The first drawback is the interest rate. Interest rates are generally higher for offset account home loans compared to regular home loans.

Another drawback is the minimum account balance that must be sustained in order for the balance of your loan to be reduced. For those who are only able to place a relatively small amount of money into their offset account, a higher interest rate and/or minimum balance requirement might cancel out the benefits of the offset.

This article is brought to you by Mozo - information about offset account home loans

Article Source: http://articlenexus.com

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Offset Account Home Loans

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