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Offset Account

Discussion in 'Investing Glossary' started by Glossary, 27th Sep, 2006.

  1. Glossary

    Glossary Active Member

    12th Sep, 2006

    An offset account is essentially a savings account that is "linked" to a loan account. Rather than earn interest on deposits in the offset account, the deposits are used to "offset" the principal of the loan account, thus effectively reducing the principal of the loan when calculating interest charges on the loan.

    A 100% Offset Account means that for every dollar of deposit in the offset account, the effective loan principal is reduced by $1.

    Offset accounts are generally considered more tax effective than a loan redraw facility, especially for investment loans. By maintaining surplus cash in an offset account, it can be drawn out at any time, for any purpose, without affecting the tax-deductibility of the investment loan it was offset against. Alternatively, if you were to redraw funds that had been deposited into an investment loan account, and those funds were for personal use, you have effectively "contaminated" the loan account through mixed use of funds, and it can be quite difficult and costly to track the private/investment use of funds from the loan. For this reason, offset accounts are generally recommended over loan redraw facilities for investment loans.