Should I have an offset account for my mortgage?
Offset accounts are beneficial products that a number of lenders offer their home loan clients. Offset accounts can potentially save you a significant amount of interest while also reducing the length of your home loan.
An offset account is a home loan feature that allows you to use any extra income or savings to reduce the balance of your loan, thereby reducing your interest repayments. Offset accounts operate as regular transaction accounts, giving you ready access to your funds. This allows you to save money on interest without physically paying the funds into the loan itself, giving you the freedom to park your funds and save on interest while keeping the loan itself free of personal transactions.
For people with owner-occupied home loans, convenience becomes the most obvious benefit. The savings in interest are the same whether you use an offset or if you pay the funds into the loan itself, but having it in a separate account can provide ease and flexibility, especially when it allows transactions. In other words, your cash can be saving you interest right up to the time it is needed.
How do offset account work?
There are generally two different types of offset accounts: 100% offset account and a partial offset account, but you’ll find that a 100% offset account is the most common.
The balance in a 100% offset account is deducted from the outstanding principal before interest is calculated for that month and is far more effective in terms of reducing interest. A partial offset account is when you receive a discounted interest rate charged on the amount equal to the balance inside the account.
To see how an offset account can be beneficial, check out the table below. Assuming you maintain $20,000 within your offset account for the life of the loan with a $500,000 loan amount, you can see that an offset account can save you almost $14,500 at a rate of 4.02% with 30 years left on the loan term.
Figures courtesy of MoneySmart Mortgage calculator.
Should you have an offset account?
The beauty of an offset account is that it suits almost every type of borrower. Every dollar in your account saves interest every day as interest is calculated daily. So by having your salary or wages paid into your offset, your money immediately has an impact while having the flexibility to access it when you need to.
For a spender, you can have your salary paid directly into your offset account, as the money will have an immediate impact on the amount of interest you pay, which is calculated daily.
If you are a saver, you may find that an offset account is more beneficial than a savings account as you may earn less interest on a savings account than what you would save on your home loan. You also won’t be paying tax on the interest that you earn; instead you will be building up valuable equity in your home.
Wouldn't that money be better off in super?
The biggest drawback to superannuation is of course that you cannot access it if life throws you a curve ball – it is locked away until you retire. For young people, the threat of job loss, or a disruption to income, such as a spouse staying home to look after children, means that extra funds may need to be accessed.
By putting extra funds into a linked offset account, you offset your interest bill and you have access to these extra funds if you need them. This is especially beneficial at the start of your mortgage when your interest payments are much higher.
However, there is a downside to easy withdrawals! A mortgage may seem like forced savings, but because today’s mortgage packages allow you to pull out contributions as easily as you put them in if you’re not disciplined enough, it’s very easy to lose the benefit of making extra mortgage repayments.
Comparatively, extra super contributions are locked away safely until you reach preservation age.
Do your research
It’s worth looking at any possible fees or restrictions on moving money around that may be associated with an offset account. Some lenders may have minimum transaction amounts and withdrawal fees if you decide to redraw money from your offset account. These fees could end up costing you more than the interest you would save, so speaking with lenders in order to understand how the offset account operates is a must.
Before making any decisions, you will need to carefully research your options and speak with both your financial adviser and your lender. Weigh their advice and decide what will best work for you.
Complied by Emma Linton Doig
Fortress Financial Solutions partner Emma Linton Doig is a financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).
Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this you should consider whether the information is appropriate in light of your objectives, financial situation and needs.