An offset account is an everyday bank account that is linked to your home loan. Any income and savings can be deposited into the account and the balance is then offset against the amount owing on your home loan.
An example – If you have a home loan standing at $300,000 and you have $100,000 in an offset account, you will only pay interest on $200,000.
“Offset” is the keyword here. In the above example, it does not mean that your home loan is reduced by $100,000, your home loan is still standing at $300,000, it is just that you have $100,000 in the linked account offsetting the interest.
It is beneficial to keep your investment income and expenses separate from your personal finances.
An offset account will allow the investment income and the expenses to flow in and out of the one account.
In a cash flow positive scenario, because there will be more money coming in than going out, a buffer of cash should start accumulating in your offset account. This buffer will give you piece of mind to know that you have cash available should something unforeseen happen such as repairs and maintenance.
A buffer could also be the start of a deposit for a future investment property.
If you have savings sitting in other accounts, you could deposit them into the offset account to reduce your interest further.
However you look at it, any cash in the offset account is yours to use as you see fit.
With an offset account you can withdraw the funds at any time. It just means that less funds will be offset against the loan and you will pay more interest.
A redraw facility on the surface looks to be similar, however, there are some very important differences. The first is you are paying down your mortgage rather than offsetting the mortgage. There are often fees to redraw. Sometimes there is a maximum amount of redraws per year and most importantly for your budget and access to your funds, your lender can decline your request to withdraw your money. It is absolutely based on the lender’s discretion.
An offset account is a crucial part of a property investing financial strategy. It allows your investment finances to be kept separate from your personal finances. This will make it easier for your accountant come tax time. It reduces interest paid on the investment property making your investment more profitable.
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