It’s a common misconception that mortgage offset accounts are loan products when in fact they are savings accounts sitting within a mortgage structure. If you’re not sure how mortgage offset accounts might benefit you – read on!
Greg and Louise are typical thirty-somethings with two children and a dog. They took out a mortgage in 2017 to purchase their home for $650,000, with $70,000 deposit and finance of $580,000 at 5% over 25 years.
When Greg received a $20,000 work bonus, he thought about putting it straight into their mortgage, but Louise preferred keeping the cash available.
Undecided, they spoke with their financial adviser who suggested they consider a mortgage offset account. They’d heard of such accounts, but weren’t sure how they worked.
Their adviser explained that an offset account would work like this:
| Without mortgage offset | With mortgage offset | |
| Amount borrowed | $580,000 | $580,000 |
| Interest rate | 5% | 5% |
| Loan term | 25 years | 25 years |
| Mortgage offset balance | $20,000 | |
| Adjusted mortgage balance | $580,000 | $560,000 |
| Fortnightly repayment | $1,565 | $1,565 |
| Adjusted term | 25 years | 23.35 years* |
| Total interest paid over term | $437,250 | $370,111* |
| Total savings: 1.65 years and $67,139 interest | ||
*Assumes continued fortnightly repayment of $1,565.
Greg and Louise thought a mortgage offset sounded perfect for them but to be certain, they weighed up the pros and cons.
Advantages
- Access to savings with EFTPOS and ATM
- No tax payable
- Equivalent interest rate to related mortgage
- Usually accept top-ups
Disadvantages
- Full offset accounts are usually only available with variable rate loans which generally have higher interest rates
- Fees and charges may apply
Their decision was made….
Greg and Louise opened a mortgage offset account and paid their mortgage directly from it. As they were currently using Louise’s salary to pay their home insurance and utilities, they deposited her salary directly into the account to pay the bills. Any cash remaining increased the balance in the account. After the first year, the account balance had grown by an additional $1,200.
The following year Greg’s work bonus of $8,000 was added to the offset account.
Not long after this, Greg’s boss asked him to move interstate for a year. He and Louise decided to rent out their home.
The rental income, paid into their mortgage offset account, exceeded their mortgage repayment by $50 per month, so this contributed a little extra to their offset account. Their financial picture began to look like this:
| Without mortgage offset | With mortgage offset | |
| Amount borrowed | $580,000 | $580,000 |
| Interest rate | 5% | 5% |
| Loan term | 25 years | 25 years |
| Mortgage offset balance | $29,200 | |
| Adjusted mortgage balance | $580,000 | $550,800 |
| Fortnightly repayment | $1,565 | $1,565 |
| Adjusted term | 25 years | 22.64 years* |
| Total interest paid over term | $437,250 | $341,221* |
| Total savings: 2.36 years and $96,029 interest | ||
Eventually, the mortgage offset account helped pay off their mortgage much earlier than they had expected but the interest savings was like finding a pot of gold at the end of the term!
Could a mortgage offset account work for your circumstances? Contact us to learn more.