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Offset Interest Formula:
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The offset interest calculation determines how much interest you'll pay on a home loan when you have money in an offset account. The offset balance reduces the effective principal amount that interest is calculated on.
The calculator uses the offset interest formula:
Where:
Explanation: The offset account balance effectively reduces the principal amount that interest is calculated on, potentially saving you significant interest payments over the life of the loan.
Details: Offset accounts can significantly reduce the total interest paid on a mortgage while maintaining liquidity, as the money in the offset account remains accessible unlike extra repayments.
Tips: Enter the principal loan amount, your current offset account balance, the annual interest rate (as decimal, e.g., 0.05 for 5%), and the time period in years. All values must be positive numbers.
Q1: How does an offset account differ from a savings account?
A: While both hold money, an offset account directly reduces the principal balance that interest is calculated on, without actually paying down the loan.
Q2: Is there a limit to how much can be in an offset account?
A: Typically, you can have up to 100% of your loan balance in an offset account, but check with your lender for specific limits.
Q3: Are offset accounts available for all home loans?
A: No, they're typically only available with variable rate loans and some specific loan products.
Q4: How often is interest calculated with an offset account?
A: Most lenders calculate interest daily on the reduced principal (loan amount minus offset balance).
Q5: Are there tax implications for using an offset account?
A: Unlike savings accounts, offset accounts don't earn interest, so there's no taxable income, making them potentially more tax-efficient.