If your Self Managed Super Fund is holding cash reserves and generating a dismal return, we might have the answer for you — you could reap the benefits of an offset account. Whether you’re keeping cash for liquidity reasons or simply waiting to find the perfect asset to invest in, this feature is a great way to get your money working more effectively, and saving you interest costs.
What is an offset account?
It is an everyday account connected to your SMSF mortgage or investment loan. Any funds in the offset account directly reduce the amount owing on your home loan for interest purposes. For example, if your home loan balance is $600,000 and you have $100,000 in the offset account, you will be charged interest on $500,000 rather than the full loan balance. This feature is an everyday transaction account, which means you can deposit and withdraw money whenever you like.
How can my SMSF benefit from an offset account?
Many SMSFs invest in cash assets and hold cash reserves to cover liquidity requirements and SMSF expenses such as taxes, insurance premiums and administration costs. With the cash rate at an all-time low, holding cash in a savings account or term deposit is generating a return not much higher than zero. It’s essential for these SMSFs to be holding cash, but at close to zero return, it’s a waste of potential.
Moving the cash into a 100% offset account means that this money is effectively earning the rate being charged on the loan. Consider the following examples. In Scenario A, you’ve got $100,000 in a term deposit for one year at 0.50%. This will earn $500 interest. In Scenario B, you have $100,000 in an offset account, where the connected mortgage interest rate is 5%. This will save you around $5,000 in interest costs over one year. In the first example — ignoring compounding for simplicity — you earn $500 but did not have an offset account, so you paid the full amount of interest on the loan — which is roughly $5,000. You made $500 but paid $5,000 in interest, so you are down $4,500 (excluding the full effect of the interest charges that applies to both scenarios). With the second example, you did not earn $500 interest, but you did not pay $5,000 in interest payments because the $100,000 in the offset reduced your interest payments. So you are up to $5,000.
| Loan amount (5% IR) | Earnings from 1 year term deposit (0.50%) | Savings from $100,000 in offset for 1 year | Total Interest paid in first year on mortgage | Net position | |
|---|---|---|---|---|---|
| Example A | $600,000 | $500 | $29,798 | -$29,298 | |
| Example B | $600,000 | $4,966 | $24,832 | -$24,832 |
In Example B, you come out about $4,500 better off simply by having an offset account to save interest rather than earn interest on a term deposit.
How can I get an offset account for my SMSF loan?
If your current mortgage does not have this feature available, it may be worth looking at refinancing your SMSF loan. SMSF Loan Experts can help you gain access to really great SMSF loans with a 100% offset account. Book your free review to learn how much money you could potentially save by refinancing and utilising an offset account for your Self Managed Super Fund. If you haven’t reviewed your loan in a while, refinancing could bring you a wealth of benefits. Taking advantage of attractive interest rates and flexible features could mean you retire with much more money in your super.
