Making extra payments onto your mortgage is very common now. Especially with low interest rates, many can afford to make extra payments to pay down the loan faster. But, where should the payments go, into the offset account or directly into the loan

Paying extra into your mortgage account will mean that the balance of the loan will reduce, and the extra payments will then be available to redraw, hence the name redraw account.

An offset account is a seperate account linked to your mortgage account, and the balance of your offset account offsets the balance of your mortgage account when calculating the interest payable. In basic terms, think a $100,000 loan and having $20,000 in an offset account, your interest is charged as if your loan is $80,000. Your monthly repayment amount stays the same, but the interest component of the repayment has been reduced, which means you are paying more off the principal of your loan.

Usually, loans that offer an offset account are slightly more expensive, however the higher interest rate or fees can be justified with the financial benefits of having an offset account.

When you have an owner occupied loan, whether you make extra payments into the mortgage or into the offset account, it usually doesn’t matter as the intention is to pay down the mortgage as quickly as possible. You should though consider an offset account if there is a possibility in the future that you turn your owner occupied property into an investment. Why? You can claim the interest on the mortgage when it’s an investment property, and you want to claim the maximum you can. If you pay into the loan, then you are essentially reducing the balance of the loan and may need to claim the interest of the reduced balance and miss out on potential tax deductions.