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To offset or not to offset

Is having an offset account really worth it? The answer is, it COULD be. There are a number of things you need to be aware of when it comes to offset accounts.

Basically an offset account means that any money in that account offsets the balance of your mortgage, reducing the amount that you pay interest on. For example, on a loan amount of $400,000 with $10,000 in an offset account, you would only pay interest on $390,000.

Sounds great, right? The thing you have to be aware of is that generally lenders charge a higher interest rate on loans that include offset accounts as well as an annual or monthly fee. A lender might, for example, offer an interest rate of 5.99% with an offset account at an annual fee of $395, compared to a basic loan without an offset at 5.69% with no ongoing fees.

So, in this situation with the offset account you would pay:

($390,000   x   5.99%   +   $395) / 12   =   $1,980   interest + fees per month

On the loan without an offset account you would be paying interest on the full balance, but at the lower rate without ongoing fees:

 ($400,000   x   5.69%) / 12   =   $1,897  interest per month

So, even when using the offset account, the loan without an offset still works out cheaper by $83 per month. You would need to keep an average balance of close to $27,000 in the offset account for it to work out better for you in this situation.

There could be a better option

A redraw facility is a great loan feature that can  be a useful tool. These days most lenders offer a redraw facility on any variable loan and will let you redraw online for free. This means that you could actually put your $10,000 savings onto your home loan, reducing the balance and the interest payable, and still have access to it when you need it. It also makes you think twice about dipping into your savings when there is no ATM card attached to it.

If you have one of these redraw facilities you can take advantage of the cheaper rate and reduce the interest you are paying. With the $10,000 in the loan account until you need to redraw, and the cheaper interest rate this is how the interest is now calculated:

($390,000   x   5.69%) / 12   =   $1,850   interest per month

Now you would be saving $130 in interest and fees charged per month compared to using an offset account. That adds up to $1,560 per year. The bigger the loan amount and the smaller your savings to offset, the more you could save in interest by forgoing the offset account in favour of the lower basic rate.

Offset accounts can certainly be a useful tool depending on your specific situation. For example, if you have an investment loan the offset feature might be better due to possible tax implications of using redraw. It is worth getting out your loan statements and getting in touch so we can look at your situation to let you know if you are getting the best out of your home loan. If you don’t want to give up your offset account there are lenders that don’t charge a higher rate for the offset feature which can certainly save you some money.

This article provides general information only. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.



 

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