Interest rates impact your monthly repayments. If you have a variable interest rate on your home loan, you may end up paying more during certain months. However, there are ways to reduce the interest charged on your loan potentially.
By setting up an offset account, you may save thousands throughout the life of your loan. This may even provide an option for paying off your home loan more quickly.
Offset Accounts Help Reduce Interest
The main advantage of setting up an offset account is to reduce the interest that your lender charges on your home loan. This interest is calculated daily and applied to your principal for your monthly repayments. Lendi offer comprehensive information and tools to help you compare the best solution for you.
The offset account is mostly a type of savings account or transaction account that is linked to your home loan. However, the funds in your account are not touched by the lender. The total funds in your account are merely used to offset the remaining home loan balance when calculating interest.
When calculating interest, the lender subtracts the balance of your offset account from the principal remaining on the loan. For example, if you have $200,000 remaining on your loan and $25,000 in your offset account, the lender will calculate interest the interest on $175,000.
Offset Accounts Help Reduce Your Tax Burden
Another benefit of an offset account is that these accounts are not taxable. With a traditional savings account, any interest that you accumulate contributes to your total taxable income. This is not the case with an offset account.
Besides avoiding additional taxes on interest, the offset account does not bring any other tax responsibilities.
Offset Accounts Provide Greater Flexibility
You also have more flexibility when it comes to paying down your home loan. While most financial advisors recommend that you do not withdraw the funds that you deposit in an offset account, you are free to make withdrawals at any time.
Having these funds available may be useful if you have trouble making your monthly loan repayments. There are no fees or charges when you make a withdrawal, providing an alternative to a traditional transaction account. The flexibility is great, but do the research to ensure offset accounts are correct for your circumstances.
Who Should Consider Getting an Offset Account?
Any homeowner in Australia may benefit from an offset account. However, several factors increase the potential advantages of these accounts.
The more money you have in your offset account, the more you save on interest. For this reason, an offset account offers more potential savings for those with a significant amount to deposit. If you are still unsure if offset accounts are right for you, visit here for a detailed out lay of home loans.
Offset accounts are also beneficial for anyone with a high interest rate or a variable rate home loan. Even if you manage to keep several thousand dollars in the offset account, you will continue to save on interest.
Keep in mind that lenders typically charge a fee for maintaining an offset account. The amount charged by the lender depends on the type of offset account. However, the annual costs are typically offset by the reduced interest.
If you are interested in reducing the interest collected on your home loan, consider setting up an offset account.