Property Sales    Property Management    Mortgage Brokering

Off-Set Account – What is this and should one have this?

Most banks offer loans that have an off-set feature.   Although it might cost you to have this feature, it is normally worth it to consider taking up this option, especially when you do have some savings.

What exactly is an Off-set account?

An off-set account is basically a transactional account that is linked directly to your loan account.  It does not pay any interest on any balances in this account but the full amount is off-set against your loan outstanding.  As an illustration,

Loan outstanding $400K          Off-set transaction account balance $40K

Your actual interest cost will be calculated based on $360K instead of $400K.   In this case, you actually save $40K of interest cost.

Besides interest savings, should your $40K be deposited into a standard interest-bearing account, you would have to pay tax on the interest earned.   In the case of an off-set arrangement against your loan, you do not have to pay any tax on the interest saved.   Some may wonder why not pay off the loan and redraw on it as and when you require the funds.   This is certainly a possibility but having it in the transactional account will give your greater flexibility and it also allows you to maximise your cash flow as explained below.

How can I optimise using the Off-set account?

One way of optimising your off-set account is to work this together with a credit card.  This credit card normally comes free with an off-set feature and it should also have a reward program for credit points chalked up for all amount charged.

Expenses                                   Loan outstanding $400K                                    Salary

Credit Card                                                       Off-Set Account $40K

The above gives an illustration on how one can optimise cash flow through the month to get maximum benefit from the use of credit card and the off-set account feature.

  • When you receive your salary, have it credited into your off-set account. In fact, all forms of income should be credited into this account.
  • As the interest on your loan is calculated on a daily basis, whatever amount you have in your transaction account will be off-set against the loan outstanding on a daily basis.
  • Instead of drawing cash from the off-set account for your regular expenses, it is recommended that you try to charge all your expenses using your credit card. In this case, you will have your account balances in the off-set account remaining at the maximum amount for a maximum period.
  • Remember that it is important to arrange for an automative payment of your credit card bills when it becomes due. This should be arranged such that it is drawn from the off-set account on the due date.
  • How do you benefit from using the credit card :
    • Credit card typically gives you 55 days free credit period. As such, for all your expenses, you get 55 days of free credit.  This amount is only deducted from your off-set account after 55 days.   As such, you are earning the interest off-set on your loan during this period.
    • With all your charges on your credit card, you will also be rewarded with reward points which you can later convert to cash or select a gift that you like.

Overall, although the amount saved may seem small but if you add it up over the year, you can well save a holiday by simply being discipline in keeping to the recommended process.  The important aspect of this flow is that you must not spend more than what you can pay off from your off-set account.   Of course, credit card interest rate is extremely high and it is by no means to be used as a credit facility but more so as a convenience and a form of optimizing the 55 days free credit and earning reward points.

So, if you understand the benefits and are prepared to watch your expenses, ensuring that you have the funds to pay off, this is certainly a good way to save some money.