Offset accounts are essentially savings accounts that can be helpful in paying off a loan. They assist you in paying down interest on a loan. However, other forms of offset accounts also exist. Both individuals and businesses make use of them to pay down loans and balance accounting books.
Offset accounts are savings accounts linked to your loan account. The interest earned on them goes to pay off interest in your loan account.
The point of an offset account is to lower the total amount of another account. An offset account decreases the total amount of the account to which it is linked. It is canceled against the other account in the end.
The interest rate earned in the offset account is the same as is earned in the other account. Although your savings balance in the offset account is likely to be much lower than you owe on, say, your mortgage, you can still make significant headway in paying off your loan. You can build equity or pay your loan off earlier.
If you have a $100,000 mortgage and an offset account with $10,000 in it, you reduce the principal on the loan by $10,000. The new principal is $90,000. Interest now only adds up on $90,000 instead of $100,000. You would continue to make regular mortgage repayments on the original $100,000. Your repayments are now reducing both the principal and interest on the loan more effectively than if the principal had not been reduced by $10,000. The offset account is still working to reduce your loan, however, as it earns interest. That interest is applied to the $90,000 balance of your loan.
Offset accounts are not only for home mortgages. They might also be used for accumulated depreciation and discounts on note payable. (See Reference 1.) An accumulated depreciation account is an offset account linked to an equipment, property and plant account. Companies record the original costs of the business’ long-term operating assets in it. The account collects depreciation expense amounts during every depreciation period. The balance is then taken away from the original cost of the assets in the other account. The amount left in the accumulated depreciation account is added in on the asset side of a business, and it is known as the book value of the assets.