Offset accounts: should you have one?

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.


What is the real cost of your daily coffee?

Having the financial commitment of a mortgage really makes you think about the value of your money. It forces you to watch your dollars a lot closer and brings into question the opportunity cost of doing one thing over another. It is surprising to see the impact that small financial habits, like your morning coffee, make over the long term.

If you’re a one-a-day coffee drinker, that is an annual cost of around $1,300. On a $500k mortgage over a 30 year period, if you were to forgo your coffee and put these funds towards paying back your loan, this would cut 2 years and 4 months off the length of your mortgage and save $30k+ of interest repayments.

As a Melbourne based broker, I know telling clients to give up coffee isn’t going to win me many friends… but… its more about the power of your dollars over the longer term. Do you have a regular financial outgoing that you could reduce or get rid of that could assist you in repaying your mortgage quicker?

  • Bring your lunch from home
  • Cancel your gym membership that you never use
  • Shop around for a cheaper health/life/car insurance product
  • Go out drinking only once per weekend
  • Book smarter holiday options
  • Do you really need that expensive car with large monthly repayments?

It may not be one thing in particular but the sum of multiple ‘sacrifices’ that can create financial gain in the long term.

Maybe you will think twice before ordering that second coffee for the day…


Spring clean your budget

Buying your dream home is one of the biggest and most exciting purchases you are ever likely to make. As house prices continue to grow, saving the necessary deposit is becoming harder and harder. You’d be surprised what a little Spring Clean can do to your savings over time.

Budgeting sucks, but neglecting to understand your outgoings will leave you further from your achieving your goals. When preparing your budget, it is important to consider your current financial situation by working out your priorities – how much you need for basic living expenses and if there is any little things that you can go without.

Budget basics

  • Begin your budget by listing all sources of regular income. There are plenty of online resources and templates that you can use to start. Include everything from employment income, dividend income, interest earned on savings and potentially family hand outs from that loving Grandma!
  • Collect your bank statements, bills, accounts and other regular expense records to give you an indication of how much you spend each month. Be realistic with yourself. There is nothing to gain by putting your head in the sand.
  • List your outgoings (with large items first) by breaking them down into two sections: fixed and variable. Fixed expenses don’t change from month to month and include things like: car loans, rent, personal loans repayments etc. Variable expenses change regularly and include groceries, utility bills, eating out and entertainment. Don’t forget to add once off annual items like car rego, health insurance and annual memberships.
  • When reviewing your categorised expenses, assess if you can make any reduction to the non-essential items in the variable spending before addressing your fixed and more essential items.
  • Compare your expenses against your income to and work out where adjustments can be made. If you find that you are not left with as much as you wish, even the smallest changes can make a difference. Do you really need to buy 2 coffees a day? Cutting out that alone could save you $2,500 a year.
  • Give yourself a realistic timeline and encourage yourself to stick to your budget. If you have an exciting goal to achieve, the sacrifices are more than worth it.

If you feel it is all too hard, just remember that saving something is better than saving nothing!