An Offset Account is a stand-alone transaction bank account that is linked to a specific loan account.
While it could be linked to a home it is often linked to an investment property loan.
It can be a very effective tool in reducing loan interest and keeping funds separate for tax purposes.
Rather than earning interest on savings, the savings balance is theoretically deducted from the loan balance, which in turn, reduces the interest charged to the loan.
Another advantage is that the Australian Taxation Office does not consider this as earning interest income and so benefit is achieved without additional tax expense.
Further, an offset account can reduce the term of the loan and allows funds to be kept ‘at call’ and used for any purpose.
There are two different types of offset accounts:
100 percent offset – Every dollar in the transaction account is offset against the loan balance, working to reduce interest charges.
For example, if the offset account has a balance of $20,000 and the loan a balance of $200,000, loan interest is calculated on $180,000.
Partial offset – A proportion of the transaction account balance is offset against the loan balance.
For example, where the offset account has a balance of $20,000, the loan a balance of $200,000 and there is a 40% offset capability, loan interest is calculated on a balance of $192,000.« Back to Glossary Index