Offset accounts, the great hack?

Australians love a good life hack and offset accounts are no exception. Collectively we have more than $257 billion sitting in these accounts – a record high.

Every month, Australians are collectively ducking an estimated $1.4 billion in interest due to offset accounts, which seems pretty clever.

However, as with all good hacks, it’s worth double checking the details, the fine print, and your own calculations to make sure there’s no catch.

What should I look out for in an offset account?

An offset account can be a great place to stash your savings because every dollar that’s in it is a dollar you don’t have to pay interest on in your mortgage.

For example, if you have $500,000 on your home loan, and $50,000 in your offset account, you’ll only get charged interest on $450,000 on the loan.

This is particularly helpful because your home loan is likely to have a higher interest rate than any savings account you can find, but also because you are required to pay tax on any interest you earn from a savings account.

The problem is, however, some banks like to charge you higher interest rates and fees for having offset accounts - so it’s worth doing your research to make sure you come out ahead.

Here’s an example:

If an average borrower with a $500,000 mortgage, on a rate of 6.25% put $50,000 into their offset account, instead of one of the highest-rate savings accounts at 5.50%, they would come out ahead by $973 over the next year (This assumes they’ve got 25 years left on their loan and that the cash rate stays put for now).

If, however, their bank charges them a rate that’s just 0.25% more, then this equation puts the savings account method $144 ahead.

That’s because while they might be avoiding paying any interest on $50,000, they’ll be paying a higher interest rate on $450,000.

There are, however, a number of lenders offering mortgages with offsets at the exact same rate, or lower, than their no-frills home loans such as CBA and Macquarie Bank.

How can I maximise my offset account?

Savvy borrowers often get their employer to put their salary into their offset account, which they then use to pay for everyday expenses throughout the month.

How does this help?

This helps maximise every dollar, because interest is calculated daily, so the $5 you’re using to catch the bus on Friday, reduces your home loan bill until then.

For example, if the average borrower put their $6,000 post-tax salary into their offset account each month and spent this money in full across their pay cycle, after a year they could save around $200.

However, not everyone will end up ahead by employing this tactic alone, because it’s important to make sure that any savings you make are MORE than the account fee you’re paying for that offset account.

For example, if that same borrower had an offset account that charged $395 in annual fees, as a big four bank charges, any savings they made would be wiped out - and then some - and they’d actually be going backwards.

What’s an alternative to an offset account?

The main alternative to an offset account is to use a redraw facility, which is where you put spare cash into your mortgage and take it back out when you need it.

While both types of account help reduce the amount of interest you pay, some redraw facilities can come with extensive fine print, so it’s important you’re completely aware of what is required.

While most redraw facilities are fee-free, certain banks charge customers for taking money out.

Some banks may also assume any extra you pay into your mortgage is theirs, not yours, so over time the amount you can redraw reduces because part of your monthly repayments are being paid for.

It’s also worth noting if you’re an investor that there are tax implications if you take money out of your loan via a redraw.

Offset? Redraw? What’s best?

Financial hacks can create some major benefits - but only if they suit your lifestyle, your mindset and your financial needs.

Take the time to compare the options for you, and even do some calculations to make sure you’re making the right decision for your circumstances.

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