What is interest prepayment and how to use it with an offset account?


Mortgage loan interest prepayment using an offset account is becoming a popular product, usually offered by banks, linking your checking/saving accounts, or any deposits to a mortgage loan account. That means, your mortgage balance is reduced by the funds you have in the offset account and you are effectively charged interest on the already reduced loan balance.

What is more important, at the end of the fiscal year you are allowed to write off mortgage interest as if you paid it in full, when in fact the amount you actually paid is a lot less. Some loan programs with offset account principal and interest prepayment will allow that you use the funds in your offset account while linked to the mortgage loan balance. Others will disallow withdrawal for 3, 6, 9, 12 months, or as specified in the contract.

Home Loan Interest Pre-Payment is recommended to investors only.

This is a particularly complex product. While everyone could benefit from it, funding your offset account with your monthly check and then withdrawing doesn't work efficiently enough.

Firstly, those payment plans may have a higher cost because the product is still pretty new.

Secondly, it has been offered by scam artists long before reputable lenders and you have to be careful who you are entrusting your money to.

Thirdly, investors, financial-savvy and wealthier consumers are the ones this product still targets on a grand scale. The reason - they are the one who could really benefit from it, and who are probably in a position to understand the product and make good use of it. Also, banks would rather have larger funds deposited with them rather than a standard weekly paycheck.

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