For some families, offset accounts can be very effective in reducing the amount of interest paid on their mortgage. Offset accounts work by offsetting the amount of money within the accounts against the mortgage, in essence reducing the principal amount owing. For example, if you have $10,000 in your offset account, and your mortgage is $400,000, you’ll only be paying interest on $390,000.
The key to effectively using an offset account, is being able to manage a credit card without overspending. Then, an offset account can hold all actual funds available, and all spending is on a credit card. If an automatic payment is set up each month to pay off the entire credit card balance, then no credit card interest will be charged. The key is to make sure you don’t spend more on your credit card than you have in your offset account!
Offset accounts are normally dollar for dollar, meaning every dollar in the offset account brings down the interest paid on the principal by a dollar. Some offset accounts cost money to maintain, while others are free. If you are interested, check with your bank to see what is available to you.
Below is an example of how offset accounts can work:
As the expenses are charged onto the credit card over the month, money can be transferred from one or multiple offset accounts into the account, from where the credit card is paid off each month.
For more information on offset accounts, talk to your bank or check out the ASIC MoneySmart website.
This advice is prepared without consideration of your objectives, financial situation or needs. Before acting, please consider if this advice is appropriate to your circumstances.