Borrowers could save thousands of dollars a year by finding a cheaper lender or switching to a redraw facility.
Residential property owners have stashed a record $228 billion in mortgage offsets that work like tax-free everyday accounts while cutting interest costs and reducing loan terms.
But many borrowers using the popular accounts could avoid paying thousands of dollars a year in higher interest rates and annual fees by finding a lower-cost competitor or using a redraw facility, which enables a borrower to access extra repayments.
Sally Tindall, research director for RateCity, which monitors rates and fees, says: “While offset accounts work well for many borrowers, there is little point paying more to have the feature if you are not making use of it. Fees can easily negate savings from having money in the account. In some cases, you could end up paying more.”
Savings in the accounts have increased by more than 14 per cent, or $28 billion, in the past 12 months, which is enough to purchase more than 20,000 average houses in Sydney.
Economists expect these amounts to fall over coming months as interest rates and household expenses continue to rise.
Financial advisers also believe some borrowers could find more effective alternatives for the savings, such as paying down capital, diversifying into other assets such as equities, or using the lump sum as a deposit for an investment property.
By contrast Paul Moran, principal of Moran Partners Financial Planning, says: “As rates increase, so does the financial benefit of earning extra interest on your savings in an offset account. Clearly, that benefit will increase as rates go higher, reducing the attractiveness of using the cash for alternative risky investments, such as equities.”
Christopher Foster-Ramsay, principal of Foster Ramsay Finance, adds: “We normally recommend an offset because it’s cash at call and easier for borrowers to navigate. Some lenders include them in a package of services which have higher fees but also include credit cards, transaction accounts, discounted insurance and lower home loan rate.”
Offset accounts deduct the value of any linked savings accounts from a mortgage before calculating monthly interest. Interest can be reduced by putting regular payments or lump sums, such as bonuses, into the linked savings or current account.
Some banks allow borrowers to open multiple offset accounts, where they allocate one account for bills and committed expenses and another for everyday spending.
The amounts offset the loan balance using the home’s existing mortgage interest rate, which is usually much higher than interest on the average savings account.
But RateCity’s Tindall says some borrowers may be better off in a redraw account, which is an additional loan feature rather than a separate account.
These generally only allow access to funds that exceed minimum repayments and can often have other restrictions, which means it is necessary to check terms and conditions with the lender.
The borrower can access funds in the account but the amount available for withdrawal generally reduces proportionately to the outstanding balance.
Phoebe Blamey, a director of Clover Financial Solutions, says the buffer provided by an offset account can reduce interest payments, which is particularly useful when rates are on the rise.
Blamey says the choice can often come down to how borrowers manage their personal finances, particularly those who like more flexibility and continued access to their money.
The potential costs of an offset account are highlighted by comparing a no-frills loan with a package loan offering an offset at CBA, the nation’s largest lender.
A package loan combines the mortgage with other banking services, such as a credit card, savings, or everyday banking account plus a mortgage offset account. The other services can also be discounted.
CBA’s package home loan with an offset account has an advertised rate of 5.6 per cent plus an annual fee of $395, which compares with the bank’s basic loan of 3.69 per cent with no additional charges.
That means an owner-occupier with a 25-year, $500,000 principal and interest loan would be paying nearly $20,000 more over two years by opting for the packaged product, according to analysis by RateCity. In reality, property buyers are likely to be offered a sharper interest rate, which would narrow the difference.
The big four banks all charge higher rates and fees for access to an offset account.
According to RateCity, there are 30 lenders, including Macquarie Bank, AMP and Bendigo Bank, who offer the same rate for an offset as their lowest variable rate.
The lowest variable rates on offer are 3.24 per cent from Gateway Bank and G&C Mutual (which also has no annual fee). Gateway’s annual fee is $299.
“On the surface, offset accounts and mortgage redraw facilities can seem similar because essentially they do the same thing,” Tindall says. “They help reduce the amount of interest charged on your home loans.”
But there are key differences that can affect accessibility and costs.
An offset is a separate transaction account linked to a home loan to reduce interest. The money can be used at any time using a debit card or transferring online. Around 60 per cent of home loans come with an offset account.
Redraws, which are offered with around 90 per cent of home loans, are a way of withdrawing extra money paid into a loan.
But some lenders restrict how much and how frequently it can be done.
The highest redraw fee is $100 for a redraw of $5000. But more than 90 per cent of lenders do not charge a fee, RateCity says.
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