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What is an Offset Account?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 February 2020
  • Copyright Protected:
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    Conjecture Corporation
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An offset account is any type of financial account that makes use of the balance of another account by reducing that balance to create a net balance between the two. An account of this type may be utilized in the management of a mortgage or some other type of loan, allowing the account owner to leverage or balance assets to best advantage. The exact process used to benefit from an offset account will vary, based on the type of outcome that is desired.

With a mortgage offset account, the process typically involves linking the mortgage account with a saving account. Doing so makes it possible to use any interest that is earned on the savings to incrementally reduce the gross balance due on the mortgage. In most cases, the link is configured so that the savings account interest is transferred to the mortgage account and applied directly to the any interest remaining due on that mortgage. If the interest on the mortgage has already been settled, the transferred amount can be applied to the remaining principal.

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A loan offset account could also serve the same purpose with personal loans, car loans, and just about any type of lending arrangement with a lender. Establishing and funding a savings account with the intent of using the interest accrued to offset interest on the loan can often provide the benefit of saving money overall, as well as helping to retire the loan before the final payment date. From this perspective, the approach can be seen as a tool that helps to protect credit ratings and keep the debtor in good standing with the lender.

A similar approach to an offset account is found with investing. In this scenario, the idea is to make use of the resources in one account to balance transactions involved in a different account. For example, this approach could be used to offset a long or short position by using the offset account to execute an opposing transaction. The end result helps to nullify the outcome of the original position, a strategy that can sometimes help to minimize unanticipated losses.

As the name implies, the general nature of an offset account is to provide some sort of counter-balance for a transaction that is taking place with another account. Bankers and other financial experts can aid consumers in determining if this type of account configuration is a good fit for their particular needs, as well as provide some insight into exactly what benefits would be derived from the arrangement. While an offset account is not a practical tool for every consumer, the approach does have benefits in a number of situations that are worth exploring.

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