Mortgage Offset Accounts…….the best accounts in the world

What is a Mortgage Offset Account?

A Mortgage Offset account is merely a savings account linked to your home loan. Some financiers offer you multiple Offset accounts linked to your home loan which can be used as very good budgeting tools. You can use Offset account/s like your savings transaction account with ATM access, transfers, BPAY etc.

That’s where the similarities with a normal savings account ends. In my opinion, if you have a home loan, 99% of the time, you’re better off with an Offset account than a savings account – why?

You can lower your interest costs and loan term: An offset account linked to your home or investment loan can significantly reduce the interest cost on your home loan, and potentially save years on the repayment term of your home loan. This differs to a savings account which pays a token credit interest % on your savings. The interest rate on a savings account would generally be lower than your home loan rate, and interest earned on the savings account would normally be subject to taxation therefore reducing the net amount you receive.

How does an Offset account work vs a savings account?

An Offset account is a transaction account attached to a home loan. Interest is calculated on the balance of the home loan less the balance of the Offset account ie interest charged on the net balance eg:

Home loan                                                      $500,000

Offset balance/s                                             $100,000

Bank calculates interest on                           $400,000

No interest is actually earned (received) on the Offset account, put simply, less interest is paid on your home loan when you have an Offset account. This differs to a savings account which means you receive credit interest from the bank (less tax).

Why should I consider an offset account?

  • An offset account may save interest and cut the length of a home loan.
  • It provides a good structure when you have a property that is an investment (or will become an investment), in that it keeps your cash separate from your loan and ensures the right funding structure is set up at the outset.
  • It’s your money, you can withdrawal it as needed using ATMs, Eftpos, Bpay etc.

Let’s compare an Offset account vs a Savings Account using $100k savings/Offset account and a home loan of $500k.

  • Offset account: So home loan balance $500k with average $100k held in the Offset account. As per below, the Offset account reduces the loan term from 30 years to 24 years and saves $172k in home loan interest.

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  • Savings account $100k @ say 2.5% would deliver interest over 30 years of $111,532 over 30 years. Note, tax would normally be paid on these earnings. Graph below:

Based on above, the offset account delivers a savings of approx. $61k over 30 years and excludes any taxation impacts (generally tax would be paid on credit interest received) and assumes interest rates are consistent over the 30 years (extremely unlikely).

 offset12

Do my monthly P&I (principal & Interest) repayments reduce with an offset account?

With a P&I loan, repayments will stay the same each month as the bank assumes an original loan term and ignores funds held in the Offset account when calculating the repayments. However, the loan will be paid off faster than the original loan term as less interest is being charged by the bank.

With an interest only loan, the greater the funds held in the Offset account, the less the monthly interest payments will generally be charged (assuming interest rates are constant) which provides free cashflow to put in the Offset account or direct cash towards other strategies.

Isn’t redraw on my home loan the same as an Offset account?

· Redraw (ie putting extra cash directly into the home loan to reduce the principal amount owing on the loan) can achieve the same result as an Offset account in respect to lowering the interest costs. However, redraw may create issues for you in the future depending on the purpose of the loan eg owner occupied vs investment. You should obtain tax advice when looking at redraw and whether redraw or an Offset account is a better structure to achieve your goals when looking at investment lending strategies.

Will a home loan with an offset account cost me more than a standard home loan?

  • Typically Offset accounts are made available under Bank Packages, which includes cheaper/free credit cards, insurance etc. Package fees vary from financier to financier and based on the amount being borrowed, your broker can provide guidance on what is the best package and structure for you.

 

About the Author: Kevin Agent is one of the two Principals of The Australian Lending & Investment Centre (Australian Credit Licence 382715), an award winning Mortgage brokerage based in Melbourne Victoria. Kevin holds an MBA, Dip.FS(FP) and Dip.FS(FMBM) and has over 30 years in the finance industry including 23 years with a major bank.

Disclaimer: This is general credit advice. I would encourage you to sit with your credit advisor to understand the benefits of using an Offset account in your own individual situation and whether appropriate. Whenever doing investment lending, you should take separate tax advice to ensure the structure of your debt achieves the right outcomes and complies with Australian tax law.