A common request from borrowers is that they ‘need’ an offset account. When asked to explain why, it’s amazing how many people say “my friend has one and they love it, so I thought I should have one too”. They suit most borrowers, but to know if one will suit you, let’s first understand exactly what an offset account enables you to do.
How do they work?
An offset account gives you the freedom to “park” your own funds (savings) in an account that is linked to your mortgage. The funds that are parked in there offset the interest charged on the total loan. These funds are freely available for you to use for your everyday transactions just in the same way you would use funds from a savings account.
In numerical terms, if you have a $100,000 mortgage at 5% interest rate with no offset account, your annual interest charge would be $5,000. If you had the exact same loan with $10,000 in your offset account, your annual interest charge would be $4,500.
The way to think of it is simple. The funds in your offset account don’t earn you interest, rather they offset the interest charged. When thinking about the opportunity cost, if the interest rate of your savings account is less than the interest rate of your home loan, then your funds will produce a more positive effect when held in your offset account.
Are they right for you?
For other people with owner occupied home loans, convenience and interest savings are the major benefits. The savings in interest are the same whether you use an offset or whether you pay the funds into the loan itself… but… having the funds in a separate account can provide convenience and flexibility especially when it facilitate transactions just like any other savings account. Your cash can be saving you interest right up to the time it is needed.
For investors, if you are claiming a tax deduction on the interest charged on your loan, then most accountants will advise you not to deposit your own funds into your offset account and draw them out. In the wash up, it is usually more beneficial to keep your investment debt high and personal debt low.
So, should you have an offset account? One of the great things about an offset account is that it can be beneficial no matter if you are a saver or spender. 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.
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.
What’s on offer?
The majority of lenders offer products that can have an offset account attached to the loan. For this, some will charge a slightly higher interest rate, however some simple sums can see if the extra cost is worth it.
When researching and comparing home loans, it’s worth looking at any possible fees or restrictions to moving money around that may be associated with the offset account. Some lenders may have minimum transaction amounts and withdrawal fees if you decide to redraw money from your offset account and these fees could end up costing you more than the interest you would save.
Before making any decisions, you will need to carefully research your options and speak with your broker and weigh up their advice as to what will work for you.