Unlocking the Mystery: How to Ensure Your Mortgage Offset Account is Working for You
As an Australian homeowner, you might be paying more interest on your mortgage than you should be. According to the corporate regulator ASIC, many banks have failed to deliver the promised savings from offset accounts, resulting in $55 million in customer compensation so far. This raises a deeper question: how can you ensure that your offset account is working for you and not against you?
What is an Offset Account?
An offset account is essentially a regular bank account linked to your home loan. The more money you have in your offset account, the less interest you pay on your mortgage. This is because the total in your offset account is deducted from the outstanding balance of your mortgage when calculating the interest.
Why are Offset Accounts Popular?
Offset accounts are popular because they allow you to pay less interest over time. According to the Reserve Bank of Australia, 55% of mortgages have an offset account attached to them, and the amount of money in offset accounts is at a record high of about $349 billion. This suggests that Australians are taking advantage of this financial hack to reduce their interest payments.
How Do I Know If I'm Getting the Benefits?
If you have an offset account attached to your mortgage, it's important to do a "health check" every few months to ensure that all the right settings are in place. You can manually check that you're paying the right interest by calculating the interest rate against your home loan. You can also log into your online banking to make sure your offset account and mortgage are linked.
One thing that immediately stands out is that banks often fail to link the offset account to the mortgage during the initial setup. This is a significant oversight, as it can result in you not receiving the benefits of the offset account. As a result, it's essential to incorporate a process to check the link after settlement.
Is it Worth Having an Offset Account?
Whether or not an offset account is worth it depends on your individual circumstances. While offset accounts can help you save money on interest, they often come with higher fees and interest rates. If you don't have enough money in your offset account, the higher fees and interest rates may actually eat away at the benefits you could be getting.
However, the landscape is changing to favor consumers, with around 45% of lenders on the Canstar database offering their lowest rates with an offset account. This means that if you shop around and do your homework, you can have your cake and eat it too.
Are There Alternatives?
An offset account isn't for everyone. An alternative option is to put your spare money into your mortgage as extra repayments, and then withdraw under a redraw facility when you need to. This option can work particularly well for owner-occupiers who want a simple set-up for their banking or those who want to put their money straight into the mortgage without the temptation to spend it.
However, it's important to read the fine print with the redraw facility, as some banks may cap the amount you can withdraw in any given month or instance. Most banks give you free and easy access to your extra payments, so it works for a lot of owner-occupiers.
For investors, it's a different set-up. If you withdraw money from your mortgage, it may result in tax complications, so it's crucial to seek advice from an accountant before putting extra payments into your mortgage.
Conclusion
In conclusion, ensuring that your mortgage offset account is working for you requires a bit of due diligence on your part. By doing a "health check" every few months, you can ensure that you're getting the benefits of the offset account and not paying more interest than necessary. While offset accounts can be a great financial tool, it's important to consider your individual circumstances and explore alternative options if they're more suitable for you.
