Offset Accounts - The Mystery Unfolded
The Reserve Bank met on Melbourne Cup Day (how dare they?) and decided to keep the cash rate steady.
There is always much talk around offset accounts attached to home loans and the perceived benefit to individual borrowers. What it is they actually do for you and your home loan?
Let’s start with a brief explanation; an offset account is a normal everyday bank account that you can deposit money in, pay bills, access from ATM’s and withdraw cash whenever you want. But, all this comes with a fee, anywhere from around $199 to $400 per year for the offset feature. Some lenders say it’s free, but their home loan rates are generally higher in those cases.
The offset feature works by calculating the rolling balance of your offset account against the home loan balance and interest for that month is calculated accordingly.
An example of how this works:
- Home loan balance is $300,000 (common for many borrowers)
- Your offset account has had an average balance of $20,000 every day for the month
- The interest payable for the month is then calculated on $280,000 only instead of the full loan balance of $300,000 ($300,000 loan balance - $20,000 offset account balance)
- This gives the borrower a saving of around $66 for the month at 4% interest
- Over a 12 month period, this is a saving of around $800 interest – quite considerable!
Of course, the challenge here is to have money consistently sitting in your everyday (offset) account. Many borrowers we speak to generally have less than $5000 on any given day in their offset account, so if we were to use the same example above, the benefit would be just $17 for the month or around $200 for the year. In this case, when you minus the annual fee to have the offset feature, you are actually close to $200 worse off. So the key to making an offset account work for you is having enough money in the offset account in order to negate the cost of the feature itself.
Please feel free to call me on 0438 041 111 to discuss your next home loan or for your confidential home loan health check - it’s free and could save you thousands on what you are currently paying.
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take The Confusion Out Of Lending’
Peter Vinci - 0438 041 111