What is a Mortgage Offset Account?

When you're saving for a home, it's important to find ways to save money on your mortgage. While interest rates in the United States and other countries are steadily decreasing, the housing market itself in many areas is growing. This makes it crucial to negotiate the price of your home before you make a down payment. However, you have other ways to save money on your mortgage, such as using an offset account. Here's a quick rundown of how a mortgage offset account can save you money on your home. 

An offset account is a way of receiving a loan for your mortgage as well as opening a savings account at the same time. In a traditional mortgage, you may only have a loan from the bank or lending agency to pay your mortgage; however, by keeping a savings account with the same lender you can actually take advantage of some added savings. A typical savings account has an interest rate, albeit generally a low one. With an offset account, your savings account accrues no interest. Instead, the interest payment you make on your home loan is calculated from the difference between your loan amount and your savings account's balance. 

In practice, this can be a great way to save you on interest payments, no matter how low your rate is. For example, if your home mortgage is $350,000, and you have $25,000 in savings, that means that the interest on your mortgage is only calculated from the difference of the two accounts: $325,000. If your loan has a 5% interest rate, that means that instead of accruing $17,500 in interest a year, you only accrue $16,250. That extra $1,250 can really add up over the year, either helping you pay off your mortgage sooner or being allocated to a different line in your budget. As such, it’s a great idea to try to save as much as possible in your offset account over the course of your loan. Not only will it help reduce the payments you make on your mortgage, but once you’ve paid off your loan in its entirety, you’ll have a sizable savings amount to spend on your child’s college or another large expense. Some offset accounts even let you contribute to them when you are paid, which can be a good way to save money without having to think about it. Automatic saving has been proven time and time again to be a great way to battle the psychological obstacles to saving money, and when it also reduces your monthly mortgage payment, it’s really a win-win situation.

You’ll get several tax advantages with an offset account when it comes to the way that interest payments are taxed. For example, if you have an offset account and are looking to borrow more money for a renovation or upgrade, you won’t be taxed on any previous interest payments, thanks to an offset account. This benefit also means that you’re getting a positive return on your savings account without having to pay extra taxes on any interest earned on your savings the way you would have to with a traditional savings account. This tax-saving benefit, when combined with the other benefits associated with an offset mortgage account can help you really make the most out of your savings and increase your earning potential.

If you’re looking to pay off your mortgage faster, getting an offset account is an excellent strategy. An offset account can help you save thousands of dollars over the lifetime of your loan, simultaneously reducing the amount of interest that you pay on your mortgage. The result is a financial strategy that benefits you in multiple ways, helping you achieve your financial goals faster.