It’s called a mortgage offset account and it may be something that can work for you. These kinds of accounts are available with most lenders, though not all have this kind of product.
Some lenders will allow 100% offsets, while others are not so generous. Typically you can withdraw from and deposit to this savings account just like any other and usually the monthly loan repayment comes from the offset account by direct debit.
Basically a 100% mortgage offset account works like this, it’s a savings account opened in combination with a mortgage but as two separate accounts. Broadly speaking, when its time to calculate the interest due on your mortgage for the month, the amount in the savings account is deducted from the balance of the loan.
So if your mortgage balance is $300,000 and there is $100,000 in the offset savings account, you’ll pay mortgage interest on $200,000, not the mortgage balance of $300,000. This then reduces the interest you have to pay on the loan for that month and for the time the funds are in the offset savings account.
If you then make your normal loan repayment you’re paying off more of the principal sum than you would otherwise with the result that next month the total interest charge is less. In the long run, that should mean paying off the loan faster and possibly saving you thousands.
There’s an added advantage. If you were to put that same $100,000 in a term deposit instead, you may have to declare the interest earned in your tax return and pay tax on it. Using a mortgage offset account means effectively you don’t earn any interest on the deposit account, so there’s no interest to declare with respect to the offset account.
Now this product probably won’t suit everyone, and you’ll need to have a careful look at the lender’s terms and paperwork to ensure this product is suitable to you. It’s certainly also worth chatting to your tax accountant or qualified adviser about it to make sure a mortgage offset account will fit into your overall financial plan and to suit your individual circumstances and needs.