The pros and cons of a mortgage offset account

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A mortgage offset account is a transaction account that is linked to an individual’s home loan. It allows individuals with a home loan to offset their non-deductible interest on the loan with the interest on the regular taxable earnings of money in a deposit.

It involves creating a savings account with a lender, so instead of receiving interest on the full home loan, individuals are charged interest on the loan minus the amount in the savings account.

For example, a $200,000 home loan charging 5 per cent p.a. will cost $833 in interest per month, but with an offset account that has an average of $10,000, interest will be calculated on $190,000, resulting in being charged $792 interest per month.

Pros
A mortgage offset account provides flexibility, in relation to being able to deposit salary and withdraw from the account as many times as you want without incurring any access fees.

Because you don’t earn any compound interest on the amount in the offset account, the ATO does not include the amount as taxable income, so the money remains tax-free.

Cons
Most offset accounts are only offered with variable rate home loans that contain a higher interest rate. This often means you will have to pay extra in banking fees and charges.

The cheapest home loan rates are usually offered for basic mortgages, so if the balance of an offset account is likely to be low, the benefit may be outweighed by higher fees and interest rates.

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