Is an Offset Account Worth the Monthly Fees? Here’s Why It Might Be.

When helping clients set up their home loans, one question I often ask is whether they’d like an offset account. While offset accounts usually come with monthly fees or slightly higher interest rates, they can offer benefits that make them worthwhile. In this post, I’ll explain some of the main reasons why you might choose to include an offset facility with your home loan; and how it can help with money management, flexibility, and access to funds.

1. Money Management within Your Banking App

An offset account functions like a regular transaction account linked to your home loan. The balance in this account offsets your loan balance, reducing the interest charged. If you prefer not to use spreadsheets or budgeting software, an offset account is great for someone who prefers to manage their money directly within the banking app. You can set up multiple sub-accounts (such as a travel fund, home maintenance savings, or school fees) and even automate your pay into these accounts. All the while, the funds in these accounts continue to offset your loan balance, helping you save on interest while keeping your budgeting simple and streamlined.

2a. Owner Occupiers: Flexibility in Future Property Decisions

If you anticipate the possibility of converting your owner-occupied property into an investment property, an offset account can be advantageous. Maintaining separate accounts for personal and investment purposes can help preserve the tax-deductibility of your mortgage interest. By keeping your personal funds in the offset account, you can ensure that the portion of your loan associated with the possible investment property remains eligible for tax deductions. This strategic separation can be more challenging to achieve with a redraw facility, where accessing funds might inadvertently affect the loan's investment status.

2b. Investors: Maximise your Tax Deductibility

For property investors, an offset account offers a key strategic advantage when it comes to tax-deductibility. Imagine you’ve made extra repayments on your investment loan. Regardless of whether you use a redraw facility or an offset account, you will save the same amount in interest.

However, by choosing an offset account, you haven’t actually repaid any part of your loan - the funds are still technically part of your loan balance. This means you remain fully entitled to claim the interest as a tax deduction. In short, using an offset account allows you to reduce interest while keeping your full tax deduction intact, giving you more flexibility for future investment or personal decisions without unintentionally affecting your tax position.

3. More Accessible Funds

An offset account gives you immediate access to your money, unlike a redraw facility, which often requires submitting a redraw request. Some banks limit the number of redraws you can make or may take a day or two to process them. For those who value quick and flexible access to their funds, an offset account provides a significant convenience without compromising interest savings.

Summary

While offset accounts may come with higher fees compared to redraw facilities, the added benefits - better money management, future flexibility, and immediate access to funds - can make the extra cost worthwhile for some. Assess your financial situation and goals to determine which option aligns best with your needs.