An offset account is used for linking savings with mortgages. Instead of earning interest, the a/c balance is deducted from the mortgage amount on a daily basis when calculating interest due. Apart from the obvious advantages of less interest amount and faster repayment, there are additional taxation benefits along with the ability to draw cash out at will without any transaction fees.
The basic offset concept is based on the operational banking principle of taking in deposits at lower interest and giving out loans at a higher rate. For example, a customer with a $100,000 home loan and $20,000 in a savings account may be paying 8% interest on the loan while getting only 4% earnings on savings. But if the savings and loan accounts are linked, the loan balance will be considered as $80,000.
So the customer is now saving 8 percent interest on $20k, instead of earning 4 percent interest on the same amount. Of course, this is just the basic concept. There is a tax benefit on top of this, because interest earnings in bank accounts are considered taxable income.
Depending on whether the customer is in a high tax bracket, this will further eat into the actual savings. On the other hand, the difference in mortgage interest saved is not taxable so it leaves the full 8% as savings. All said and done, if managed properly, an offset account can easily create an extra 5-6% savings as compared to savings accounts.
As a bonus, the money is not actually locked up or paid off into the mortgage. It's still there in the savings a/c and can be withdrawn, used and paid back in as required. There is no paperwork or delay, and no transaction fees charged when drawing the money. When it is put back in, the funds are again used to reduce the loan amount.
This comes in handy when an investor wants to complete a quick buy and sale transaction, or when a business owner needs urgent funds to get raw material for fulfilling an order. Along these lines, note that both savings and current accounts can be linked to the mortgage. Actually, the concept first became popular when it was used with current accounts.
Under the CAM or current account mortgage, all loans, debts and accounts are pooled. So the bank factors in the customer's home loan amount, card debt, personal loans, etc. It then deducts the cash in the offset account from the total debt and shows a single balance amount for which one interest rate is charged. It makes both banking and personal finance easier, and saves interest in the long run.
The basic offset concept is based on the operational banking principle of taking in deposits at lower interest and giving out loans at a higher rate. For example, a customer with a $100,000 home loan and $20,000 in a savings account may be paying 8% interest on the loan while getting only 4% earnings on savings. But if the savings and loan accounts are linked, the loan balance will be considered as $80,000.
So the customer is now saving 8 percent interest on $20k, instead of earning 4 percent interest on the same amount. Of course, this is just the basic concept. There is a tax benefit on top of this, because interest earnings in bank accounts are considered taxable income.
Depending on whether the customer is in a high tax bracket, this will further eat into the actual savings. On the other hand, the difference in mortgage interest saved is not taxable so it leaves the full 8% as savings. All said and done, if managed properly, an offset account can easily create an extra 5-6% savings as compared to savings accounts.
As a bonus, the money is not actually locked up or paid off into the mortgage. It's still there in the savings a/c and can be withdrawn, used and paid back in as required. There is no paperwork or delay, and no transaction fees charged when drawing the money. When it is put back in, the funds are again used to reduce the loan amount.
This comes in handy when an investor wants to complete a quick buy and sale transaction, or when a business owner needs urgent funds to get raw material for fulfilling an order. Along these lines, note that both savings and current accounts can be linked to the mortgage. Actually, the concept first became popular when it was used with current accounts.
Under the CAM or current account mortgage, all loans, debts and accounts are pooled. So the bank factors in the customer's home loan amount, card debt, personal loans, etc. It then deducts the cash in the offset account from the total debt and shows a single balance amount for which one interest rate is charged. It makes both banking and personal finance easier, and saves interest in the long run.
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Make substantial interest savings on your home loan by using an mortgage offset account that will slash years off your home loan. You can also use a mortgage offset calculator. to estimate just how much you will save. This article, Mortgage Offset Account Features And Benefits is available for free reprint.
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