Mortgage offset accounts have steadily increased in popularity since they were first introduced in Australia in the late 1980s. A recent study by the University of Sydney found that around 40% of Australian mortgage holders use offset accounts. Although they are obviously financially beneficial in many cases, their widespread acceptance does not mean that they are automatically the right choice for everyone.
It’s worth taking a close look at the facts.
A simple definition of mortgage offset accounts
A mortgage offset account is a transaction or savings account linked to a mortgage held with the same financial institution. It allows the balance in the offset account to reduce the interest payable on the mortgage. For example, an $800,000 mortgage with $50,000 in the offset account would mean that interest would be payable on only $750,000.
Offset accounts favour the wealthy
The university study found that households with higher incomes, bigger mortgages, and more expensive homes are much more likely to benefit from offset accounts. Conversely, those with smaller mortgages may be paying fees or higher interest rates without getting any significant benefit. The pricing complexity of mortgage products can make it difficult to work out whether an offset account would be the best solution in your case.
Where an offset account can be a good choice
Large cash balance
An offset account can be valuable when you regularly keep a large, ongoing cash balance in it, such as your salary, emergency fund or savings. Unlike the interest earned in a regular savings account or term deposit, the interest saved by an offset account is tax free.
Flexibility
The money in your offset account is always immediately accessible. In contrast to a mortgage redraw facility (which allows you to access any mortgage payments you’ve made over and above the minimum repayments), you will not need to go through any formal application or activation process, or be subject to any restrictions on the amount you can withdraw.
This flexibility may be particularly useful for the self-employed or anyone with an irregular income.
Potential investment property
From a tax viewpoint, an offset account may be preferable to paying down the loan or using a redraw facility if you intend to convert your home to an investment property later. But it’s a complex tax situation, and property flippers in particular need to get financial advice before making a loan decision.
Where an offset account may not be ideal
Higher interest rate, high fees
Mortgage Choice broker Paul Williams, in a recent interview, said:
“Most banks impose a slightly higher interest rate for offset accounts compared to basic home loan packages, along with monthly fees ranging from $10 to $30.”
This means that if you’re not regularly depositing a reasonable amount of cash into your offset account and maintaining a balance of about $20,000 to $30,000, you might be better off with a basic variable home loan, which could be about 0.2% p.a. cheaper and be fee-free.
Spending temptation
Maximising the benefit from your offset account requires a certain amount of financial discipline. The ease of access to cash in an offset account can make it tempting to withdraw it and reduce the balance to below a useful level.
Small loan balance
A cheaper basic loan with no offset can be more effective if your loan balance is low, such as when you’re close to retirement or you’re zealously paying off more than you need to in order to reduce your loan balance.
Think before you act
An offset account should not be a default option for everyone. They work best for financially disciplined individuals with large mortgages who can maintain a significant cash buffer or have irregular income.
For others, the lower interest rate and fees of a no-offset loan can be a better choice.
Before locking in an offset account, consult with one of our financial advisers to ensure your loan aligns with your broader financial strategy.
| The information provided in this article is general in nature only and does not constitute personal financial advice. |