Offset accounts explained – how to make clever use of them

By Kate Beaumont, Accredited Mortgage Consultant

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!

What is an offset account?

Greg and Louise are your typical thirty-somethings with two children and a dog. They took out a mortgage in 2016 to purchase their home for $450,000, with $50,000 deposit and finance of $400,000 at an interest rate of 5% over 25 years.

When Greg received a $10,000 work bonus, he thought about putting it straight into their mortgage, but Louise preferred keeping the cash available.

Undecided, they spoke with their mortgage broker who suggested they consider a mortgage offset account. They’d heard of such accounts but weren’t sure how they worked.

Their financial adviser explained that an offset account would work like this:

  Without mortgage offset With mortgage offset
Amount borrowed $400,000 $400,000
Interest rate 5% 5%
Loan term 25 years 25 years
Mortgage offset balance $10,000
Adjusted mortgage balance $400,000 $390,000
Fortnightly repayment $1,079 $1,079
Adjusted term 25 years 23.79 years*
Total interest paid over term $301,508 $277,658*
Total savings: 1.21 years and $23,850 interest

 

*The above mortgage offset example is illustrative only and is not an estimate of the investment returns you will receive or fees and costs you will incur.

This example is based on the following assumptions:

(a) Assumes continued fortnightly repayment of $1,079 and interest rate remains 5% pa.

Greg and Louise thought a mortgage offset sounded perfect for them but to be certain, they weighed up the pros and cons.

Advantages of an offset account       

  • Access to savings with EFTPOS and ATM
  • No tax payable
  • Equivalent interest rate to related mortgage
  • Usually accept top-ups

Disadvantages of an offset account

  • 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 $400,000 $400,000
Interest rate 5% 5%
Loan term 25 years 25 years
Mortgage offset balance $19,800
Adjusted mortgage balance $400,000 $381,400
Fortnightly repayment $1,079 $1,079
Adjusted term 25 years 22.81 years*
Total interest paid over term $301,508 $258,693*
Total savings: 2.19 years and $42,815 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!

A loan offset calculator helps you to see how much interest you could save by offsetting your savings against your home loan. Could a mortgage offset account work for your circumstances? Contact us to learn more.


Kate Beaumont is an Authorised credit representative of AMP Financial Planning.

Blueprint Planning Pty Ltd (ABN 78 097 264 554), trading as Blueprint Wealth, is an authorised representative and credit representative of AMP Financial Planning, Australian Financial Services Licensee and Australian Credit Licensee 232706.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

Sources: 

www.infochoice.com.au (Online savings accounts comparison) and www.moneysmart.gov.au (Calculators and apps)