The mortgage offset account must be one of the best financial products introduced to Australia in the last 30 years. It can be a great way for people to save money they would otherwise be giving away to the bank and the taxman. Yet too many people are not taking advantage of the full benefits an offset account provides.
A mortgage offset account lets you deposit your savings into an account attached to your mortgage, so that the balance of your account “offsets” the amount owing on your home loan and reduces your interest accordingly. But it is not the same as an extra repayment. You can generally still get access to any of the money in your offset account without restriction if you need to.
Financial planners are often surpised to see people who have saved diligently and built up money in a separate deposit account, but are throwing money away by not using a mortgage offset account instead. Let’s say you have an owner occupier mortgage with 5% pa interest rate, and have saved $20,000 in a high interest deposit account earning 4% pa. If you put that $20,000 into a mortgage offset account instead, the effective return would be $1,000 pa in the form of saved interest. Tax free. But if it stays in the deposit account the return would only be $800. Taxable! If your marginal tax rate is 39% the net return on the deposit account is only $488 pa. Less than half the offset account benefit!
Interest rates change all the time of course, but the best deposit rates are generally at least 1% less than whatever the mortgage rate is at any given time.
What if you had money in a deposit account earning 0%? Obviously your loss would be even greater. But people do this all the time. If you have an owner occupier mortgage and choose to have your salary paid into a nil interest transaction account for the convenience of electronic banking and ATM access, this is potentially what is happening to you.
One strategy we use with a lot of our clients is to have their salary paid directly into an offset account, then schedule monthly electronic lump sum transfers from the offset account to their existing transaction account to cover anticipated bills and spending money requirements. This makes sure that excess savings accumulate in the offset account where they do more good. It also helps greatly with ongoing budgeting and expense management. If there are extra non budgeted expenses during the month the offset account can be accessed as needed, but otherwise it remains untouched.
Unfortunately not all mortgages come with an offset account, and banks typically don’t promote them much as they reduce the amount of interest the bank receives.
However it’s generally not too hard to find a good mortgage with an offset account. ICT Wealth now offers mortgage broking services, so let us know if you would like any help with this. We’ll probably find you a lower interest rate at the same time! In most cases you can still keep your current transaction account and credit cards if you change mortgage providers.
Also please note that the strategy described above only relates to owner occupied mortgages. Investment loans are a different situation which we will cover further another time.
If you would like to discuss mortgages in relation to your own situation, please send us a message.