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 basic offset concept is based on the operational banking principle of taking in deposits at lower interest and giving out loans at a higher rate. For example, a customer with a $100,000 home loan and $20,000 in a savings account may be paying 8% interest on the loan while getting only 4% earnings on savings. But if the savings and loan accounts are linked, the loan balance will be considered as $80,000.
As a result, the home owner saves an interest amount equivalent to 8% of 20,000, instead of getting 4% interest as earnings. Of course, that's just the simple math. The reality is that the normal 4% interest accrued in a savings a/c is considered income, and taxed as such.
Depending on whether the customer is in a high tax bracket, this will further eat into the actual savings. On the other hand, the difference in mortgage interest saved is not taxable so it leaves the full 8% as savings. All said and done, if managed properly, an offset account can easily create an extra 5-6% savings as compared to savings 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 It's still there in the savings a/c and can be withdrawn, used and paid back in as required.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.
This comes in handy when an investor wants to complete a quick buy and sale transaction, or when a business owner needs urgent funds to get raw material for fulfilling an order. Along these lines, note that both savings and current accounts can be linked to the mortgage. Actually, the concept first became popular when it was used with current accounts.
Current account mortgages (CAMs) were used to pool a customer's debts, loans and deposits. Every day, the bank would tote up the mortgage balance, card debt, personal loans and any other debt a customer may have with them. The customer's offset account balance is then deducted from the total debt, and a single interest rate is applied on the net debt. It simplifies banking and personal finance, and also reduces the net interest payable over the long run.
The basic offset concept is based on the operational banking principle of taking in deposits at lower interest and giving out loans at a higher rate. For example, a customer with a $100,000 home loan and $20,000 in a savings account may be paying 8% interest on the loan while getting only 4% earnings on savings. But if the savings and loan accounts are linked, the loan balance will be considered as $80,000.
As a result, the home owner saves an interest amount equivalent to 8% of 20,000, instead of getting 4% interest as earnings. Of course, that's just the simple math. The reality is that the normal 4% interest accrued in a savings a/c is considered income, and taxed as such.
Depending on whether the customer is in a high tax bracket, this will further eat into the actual savings. On the other hand, the difference in mortgage interest saved is not taxable so it leaves the full 8% as savings. All said and done, if managed properly, an offset account can easily create an extra 5-6% savings as compared to savings 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.
This comes in handy when an investor wants to complete a quick buy and sale transaction, or when a business owner needs urgent funds to get raw material for fulfilling an order. Along these lines, note that both savings and current accounts can be linked to the mortgage. Actually, the concept first became popular when it was used with current accounts.
Current account mortgages (CAMs) were used to pool a customer's debts, loans and deposits. Every day, the bank would tote up the mortgage balance, card debt, personal loans and any other debt a customer may have with them. The customer's offset account balance is then deducted from the total debt, and a single interest rate is applied on the net debt. It simplifies banking and personal finance, and also reduces the net interest payable over the long run.
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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. Check here for free reprint license: Mortgage Offset Account Features And Benefits.
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