Mortgage Offset Glossary Definition: What It Means and Why It Matters
What is a Mortgage Offset?
A mortgage offset is a financial arrangement that links your savings or transaction account to your mortgage. Instead of earning interest on your savings, the money in your offset account is used to reduce the outstanding balance of your mortgage when calculating interest. This helps you pay less interest and potentially pay off your home loan faster.
How Does It Work?
Imagine you have a mortgage balance of 20,000 in a linked offset account. The lender will only charge you interest on 300,000 - 300,000.
Example
| Item | Amount |
|---|---|
| Mortgage balance | $300,000 |
| Offset account balance | $20,000 |
| Interest calculated on | $280,000 |
If your mortgage interest rate is 4%, you would save interest on 800 annually.
Why is a Mortgage Offset Important?
- Interest Savings: By reducing the loan balance on which interest is calculated, you pay less interest over time.
- Faster Loan Repayment: Less interest means more of your payments go toward the principal, allowing you to clear your mortgage sooner.
- Liquidity: Your money remains accessible in the offset account unlike making extra repayments directly into the mortgage.
- Tax Efficiency: Interest saved via an offset account is not considered income, so you don't pay tax on it like you would on interest earned in a savings account.
Summary
A mortgage offset account is a powerful tool for homeowners to reduce the cost of borrowing, maintain access to their savings, and accelerate mortgage repayment. It's especially useful for borrowers who maintain a healthy savings balance alongside their home loan.