MORTGAGE customers tucking cash into an offset account may be shaving money off their interest costs but it requires some serious discipline.
Online savings and term deposits accounts are offering dismal returns at around 1 to 2 per cent, so for many customers having money parked in an offset facility is a far better option.
Many home loan interest rates are around four per cent.
An offset account is a daily transaction account linked to a home loan.
If customers have a 00,000 home loan and have 0,000 in an offset they are only charged interest on 90,000.
Customers need to be careful they don’t just dip into these funds at any opportunity, particularly because the cash held in the account is linked to a daily transaction card that can be used willy-nilly.
Calculations by financial services firm Canstar found if a customer with a 30-year 00,000 had 0,000 in parked in an offset account they will save more than 0,000 over the loan term.
They will also cut one year and five months off their loan length.
This is on a loan with a standard variable rate of 4.44 per cent.
Home Loan Experts’ managing director Otto Dargan said while offsets can be a good way to cut interest charges, they do come at a price.
“To get an offset account with most lenders you have to join their professional package and pay an annual fee of around 00,’’ he said.
“When you consider that interest rates today are around four per cent that means that you would need to have an average offset balance of 0,000 just to pay for the annual fee and break even.
“Generally offset accounts are great for people who tend to have a lot of cash sitting in their account.”
For some home loan customers having a redraw facility means there’s no need to also have an offset account.
In the redraw facility extra amounts of money paid into the loan are able to be accessed at any time.
For the disciplined customer this works well, but for mortgage customers who cannot resist the temptation of dipping into their redraw account. it can be problematic.
Canstar spokeswoman Belinda Williamson said when it comes to working out if your money is better in a savings account or an offset it comes down to number crunching.
“For example putting 0,000 in an offset account from day one for a loan of 00,000 with an interest rate of 4.44 per cent could save someone 53 in interest paid in the first year of their loan,’’ she said.
“Compare this to the interest they would get in a savings account with an interest rate of 2.19 per cent on an equivalent deposit, which would be 16.”