Offset accounts – making your savings work harder

For many homeowners, an offset account is one of the most valuable features attached to their home loan.

In fact, around 55% of mortgages now have an offset account, with a record $349.1 billion sitting in offset accounts across the country. It is estimated that Australians are collectively saving around $61 million in mortgage interest every day by having money in their offset accounts.

But recent media coverage has highlighted the importance of making sure you are receiving the benefits of an offset account. An ASIC investigation found that some borrowers had been missing out on the interest savings they were expecting because their offset accounts had not been correctly linked to their home loans. The eight banks investigated had paid a combined $55 million in compensation to affected customers.

What exactly is an offset account?

An offset account is a transaction account linked to your home loan. The balance in the account is used to reduce the amount of your loan on which interest is calculated.

For example, if you have a $600,000 home loan and $50,000 sitting in a 100 per cent offset account, you will generally only pay interest on $550,000. You still owe $600,000 on your mortgage, but the $50,000 sitting in your offset effectively reduces the balance used to calculate your interest. And unlike making an extra repayment directly onto your mortgage, the money in your offset remains accessible. You can use it for everyday spending, have your salary paid into it or keep your savings and emergency funds there.

Why can an offset make a difference?

The benefit comes from having your money work in two ways at once. Your savings remain available to you, while also potentially reducing the interest charged on your home loan.

Canstar’s analysis illustrates just how significant this could be. For a borrower with a $600,000 mortgage, 25 years remaining and $50,000 consistently held in an offset, it estimates the borrower could potentially save more than $157,000 in interest over the life of the loan and pay the mortgage off more than four years earlier. This is based on a number of assumptions, including a constant interest rate and the $50,000 remaining in the offset for the full term of the loan, so it is an illustration rather than a guarantee^.

Even without maintaining that kind of balance, having your salary, savings and spare cash sitting in an offset could make a difference over time.

Is an offset right for everyone?

While an offset can be a great feature, it is not automatically the best option for every borrower.

Some loans with offset accounts have higher interest rates or additional annual or package fees. If you generally keep very little money in the account, those costs could outweigh the interest savings.

It is worth looking at the overall loan package, including the interest rate, fees and other features, rather than choosing a loan simply because it offers an offset.

Already have an offset? Make sure it is working

The ASIC investigation found problems with accounts not being set up or linked correctly. The tricky part is that you may not immediately notice there is a problem. You can continue using your account as normal while potentially missing out on the interest savings you expected.

It’s worth taking a few minutes to check your banking app or online banking and make sure your offset is linked to your home loan. If you are unsure, contact your lender and ask them to confirm it.

Could an offset work for you?

If you do not currently have an offset account but regularly have savings or spare cash sitting in a transaction or savings account, it may be worth considering whether an offset could make sense for you. The potential benefit will depend on your loan balance, how much money you can keep in the account, the interest rate and any fees involved.

If you are considering an offset account, we can help you understand how they work, what to look out for and whether an offset could be a worthwhile feature for your home loan.

If you have any questions or need any information please give us a call on 039723 0522.

Integrity One Wealth Advisers  Pty Ltd