The offset account concept is used to link a mortgage with the home owner's savings. These accounts do not earn interest, but the bank deducts the savings balance from the home loan amount before calculating the daily interest. Obviously the loan gets repaid faster and the net interest paid will be lower. But there are additional tax advantages as also the benefit of being able to withdraw cash anytime without having to pay any fees.
The key to the whole offset business is the fact that banks pay a smaller interest rate on savings while they charge a higher rate for loans. Assume a home owner has a pending $100,000 home loan at 8% and $20,000 as savings accruing interest at 4%. By linking both, the daily mortgage interest is calculated on $80,000.
The customer now pays less interest equivalent to 8% of $20k, instead of earning 4%. The extra 4% is just the simple math. It actually works out to be a lot more, because earnings in savings accounts are taxed.
If the customer happens to be in a high-tax bracket, it means a big chunk of the earnings goes to the tax-man. But when linked to the mortgage, the interest amount saved is not taxable and this means the customer gets to keep the full 8 percent. Done properly, the offset account easily saves an extra 5 to 6 percent, as compared to regular banking 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 It's still there in the savings a/c and can be withdrawn, used and paid back in as required.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.
For example, if an investor wants to buy and sell some assets or a business owner wants to buy raw material to fulfill an order for a quick profit, it can be done using this money. Note that this system is not limited only to savings accounts. In fact, the whole concept began with current accounts.
The CAM (current account mortgage) creates a single pool of a customer's debts and deposits. This includes the mortgage, personal loans, card debts and savings/current accounts. The money in the offset account reduces the pooled debt amount, and the customer is charged a single interest rate for the net debt. This makes personal finance management and banking easier, and it reduces the net interest paid in the long-term.
The key to the whole offset business is the fact that banks pay a smaller interest rate on savings while they charge a higher rate for loans. Assume a home owner has a pending $100,000 home loan at 8% and $20,000 as savings accruing interest at 4%. By linking both, the daily mortgage interest is calculated on $80,000.
The customer now pays less interest equivalent to 8% of $20k, instead of earning 4%. The extra 4% is just the simple math. It actually works out to be a lot more, because earnings in savings accounts are taxed.
If the customer happens to be in a high-tax bracket, it means a big chunk of the earnings goes to the tax-man. But when linked to the mortgage, the interest amount saved is not taxable and this means the customer gets to keep the full 8 percent. Done properly, the offset account easily saves an extra 5 to 6 percent, as compared to regular banking 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.
For example, if an investor wants to buy and sell some assets or a business owner wants to buy raw material to fulfill an order for a quick profit, it can be done using this money. Note that this system is not limited only to savings accounts. In fact, the whole concept began with current accounts.
The CAM (current account mortgage) creates a single pool of a customer's debts and deposits. This includes the mortgage, personal loans, card debts and savings/current accounts. The money in the offset account reduces the pooled debt amount, and the customer is charged a single interest rate for the net debt. This makes personal finance management and banking easier, and it reduces the net interest paid in the long-term.
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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
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