Mortgage offset account

Hi James,

As you described initially an offset has the effect of reducing your principle and as such using your numbers the interest would be calculated on $40K and not $50K.

Derek
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The benefits is the direct reduction of the principle with the amount in the account. To look at this closer it would be the same as having the same amount in another account that got paid the interest rate of the loan, say for example 7%, but instead of being hit with tax on the interest there is no tax on it. So for every $ offset through the savings made in interest the governement cannot take their ‘share’ of it.

Many offset accounts do have minimum account balances before allowing offset amounts to start. an example would be $2000, if on a particular day your account did not have $2000 or more in it then none of the amount less than $2000 would count, but if you had more than $2000 on any particular day then the whole amount would count (if the account is 100% offset). Lets take a look at a generic situation:

Over a 1 week period, a loan has a balance of $110,000, the first five days you had an offset account balance of $10,000, the sixth day you withdrew $9,000 for payment on a second car and on the seventh day you received pay from your work of $1,500

Daily Interest = (110,000 – (offset if bigger than 2000 else 0))*(0.07/365)
In each of the first five days interest came out to be $19.18, the sixth day since none of your offset could be counted that day your interest was $21.10 but on the seventh day with the inclusion of your pay bringing you back above $2000 the interest was $20.62.

Do note like a savings account you still have full access to the money in the offset account. There is no savings account interest charged on the amount since it is reducing the amount of interest being charged on your home loan. Also the example shown was a rough example, rounding up and whether the bank uses minimum daily or end of day balances might be left to those who know the workings of banks in general. I think mine works off the balance at the end of the day.

Some mortgage offset loans also include a free redraw facility (redrawing is the ability to gain access to money saved over the normal payment scheme of the loan in simple terms). Usually requires a minimum amount to be redrawn from the loan, but offset accounts by their nature can help you knock off loans quicker than a standard principle and interest loan would leaving amounts you can get access to if you need it.

A disadvantage is that these loans may not have the absolute cheapest interest rates around and few banks allow the fixing of interest rates apart from the initial ‘honeymoon period’ of some loans.

Hopefully I haven’t made any errors in this and it will help you in deciding if an offset account is for you.

But are the actual interest rates themselves as good as some of the straight variable interest rates?

A quick comparison shows that some rates are lower if a straight variable, but some others are basically the same rate. So offset have almost completely caught up to variable loans in my opinion. I’d say the main disadvantage between offset and straight variable is the ability to fix the rate after the initial introduction period of the loan. Is that correct Simon? or has someone come along and started fixed-rate offset loans that can be fixed for say 5 years?

Having used the search function, I can’t find the answer to this one;

I want to open an offset account for our IP. It is a split loan. IO = 350k fixed for 3 yrs, P&I = 62k variable. I phoned up my mortgage broker and he said I need to open the offset account against the P&I portion rather than IO. When I phoned the bank they said they would charge me 2 fees to otherwise open 2 offset accounts for both parts of the loan. I only want one offset account anyway and I just want to know if my mortgage broker gave me the right advice? That way I can go into the bank knowing what I want.

Thanks for your comments

CBA (Mortgage adv pack)). Perhaps that is why he said open it in the P&I then, because it is the only portion not fixed that still has an interest component?