An interest-only home loan with an offset account can give you greater control of your debt.
Interest-only home loans reduce your monthly repayments. These loans offer a set period, generally 1 to 5 years, during which you only pay the interest portion of your mortgage while leaving the principal untouched.
Adding an offset account to an interest-only home loan can give you greater control over your mortgage debt while freeing up funds for investment.
Compare interest only loans with offset accounts
How do interest-only loans with offset accounts work?
An offset account works by reducing the amount you're charged in interest. It functions as a linked transaction account that you can deposit into and withdraw funds from, just like any transaction account. However, what makes offset accounts different is that the amount you're charged in home loan interest is reduced by the funds held in the offset account.
For example, let's say you have a $500,000 home loan with $20,000 sitting in an offset account. Instead of being charged interest on $500,000, your interest would be calculated on $480,000.
Adding the interest-only feature to this means you can significantly reduce your repayments. If you're only paying interest and the interest you're being charged is reduced by the funds in the offset account, you'll end up a substantially lower home loan repayment.
However, it's important to remember that during the interest-only period, you won't be reducing your debt. Because you won't be making principal payments, you'll end your interest-only period owing the same amount you originally borrowed.
Why would I use an interest-only home loan with an offset account?
Property investors like this structure because it allows them to maximise both their cash flow and tax-deductible debt.
If you're a property investor, you can deduct your mortgage interest payments from your taxes. By taking an interest-only home loan, you ensure that your entire home loan repayment is deductible. Coupling this with an offset account means you can reduce your repayments.
But interest-only home loans with offset accounts aren't just for investors. Owner-occupiers can use the loans to take more control of their mortgage debt. Rather than making a full principal and interest repayment, as an owner-occupier you can pay the interest portion and put any extra funds in your offset account. This means your repayments will continue to reduce as the balance in the offset account grows. It also means you have access to the funds in the offset account should you need them.
At the end of the interest-only period, you could use the funds in the offset account to make a lump sum repayment on the principal of your home loan. Or, you could choose to use the funds to invest.