How 100% Offset Works
So you’ve heard the talk about these 100% Offset Home Loans, but what is everyone going on about? Can it really be that different
from your current loan?
Well the answer is simply… yes. A 100% offset home loan can make a significant difference!
If used effectively it can significantly lower the interest you will pay over the life of your loan.
By simply offsetting your mortgage with any spare cash or savings you may have, you reduce the interest charged on your home loan.
How the 100% offset home loan works
The offset account is a fully transactional account which is linked to your loan.
You have complete access to any funds in your offset account through both card and online access.
This offset account is linked to your mortgage loan.
You can choose to have your salary deposited into the offset account, along with deposits of any savings you have available. Remember, the more money in the offset account, then the greater the interest benefit!
Interest is calculated on your savings at the same rate as your home loan on a daily basis, this amount is then deducted from the interest charged on you loan account.
Effectively interest is charged on the difference between your outstanding loan balance and the savings you have in your offset deposit account, while still keeping those funds easily accessible.
So let’s think about this. Say your home loan has interest being charged at a rate of 6.50% p.a. You might also have a savings account with your bank earning interest at a rate of 3% p.a. (if you are lucky). And don’t forget you must declare the annual interest you earn on this savings account at tax time.
How would your situation improve if you could refinance your mortgage to a 100% offset home loan? Again the interest rate on the loan is say 6.50% p.a. but your savings are now deposited into the offset account so the interest on your savings is now also calculated at 6.50% p.a.
Not only have you increased the rate applicable to your savings, but because the interest you are ‘earning’ on the offset home loan account is deducted directly from the interest charged on your actual home loan you do not have to declare the interest earned on the 100% offset account as income, because Government legislation treats it considered “tax free”.
Well it gets even better. With a limited number of lenders, not only can you have the benefit of significantly reducing the interest on your home loan with such a flexible facility, you can also have the flexibility of the 100% offset loan while on a fixed interest rate.
With the uncertainty of the market at the moment, a lot of people are looking for the stability of a fixed rate - however fixed interest rate home loans from the major banks do not allow you much flexibility when it comes to making additional loan repayments and reducing your interest charged.
With a select number of 100% offset home loans you can fix the interest rate on your loan and still make unlimited deposits into the offset account to reduce the interest charged.
So to sum it all up, with an offset account you can effectively ‘earn’ interest on your savings at the same rate as you home loan, the interest charged on your home loan is reduced by the amount of interest ‘earned’ on your savings in your offset account, meaning you are reducing the amount of interest you have to pay to the bank.
Furthermore you do not have to pay tax on the interest earned on your offset account.
That’s what they are all talking about!