Offsetting Your Mortgage Interest

Some home mortgage loans include a helpful feature called mortgage offset accounts. The mortgage offset feature utilises a savings account that is linked to a borrower’s home mortgage loan. Interest that accrues on the savings account is applied to, that is, offset against, the interest owing on the home mortgage.

In effect, you will no longer earn interest on your savings account. This gives you a tax benefit: since your savings account is not generating any assessable interest income, you will not pay any taxes.

In order for the mortgage offset feature to work seamlessly, the holder of your home mortgage loan has to be the depository institution at which you maintain your linked savings account. It is possible that your lender will not allow you to link your mortgage offset account to a basic home loan.

A down side on home mortgages offering this feature is that they usually attract higher standard variable interest rates. Do not be surprised, therefore, if the interest rate on your home mortgage with the mortgage offset feature will be higher than a standard mortgage, or there may be some monthly fees involved.

Lenders may also set some other conditions. In some cases, you will need to have at least $2,000 deposited in the account to trigger activation of the mortgage offset function. On the other hand, there are other lenders who will offset the amount of the home mortgage dollar-for-dollar if the amount saved in your mortgage offset account exceeds $2,000. The point is that conditions may vary from one lender to another so you should check them out.

Aside from the tax benefit mentioned earlier, mortgage offset arrangements have one more advantage: they enable you to pay off the principal on your home mortgage at a faster rate. Since you are making your regular repayments anyway and you’re getting some help on mortgage interest from the mortgage offset account, your principal gets whittled down faster.

How fast will depend on how much money and how long it remains in the mortgage offset account. To illustrate, a $100,000 home mortgage for 25 years at an interest rate of 7% p.a. implies that you would pay a total of $112,000 in interest over the life of the loan. But if at the same time you maintained a $10,000 mortgage offset account and kept it deposited for the same term as the mortgage, your total interest payments would only be about $75,000 over the same period. Not only that, you would be able to pay off the mortgage in approximately 20 years and not 25.

It certainly is not likely that you will keep that amount of money deposited in the mortgage offset account for such a long period. But if you do the sums, you will realise that even by keeping it there only for the first 3 years of the loan you will save a substantial amount in interest payments on the home mortgage.

By using mortgage offset account, you will save money in two ways — on taxes and on total interest payments.

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