Offset Accounts Are Pointless Wastes Of Money

I can already hear you all cry out in response to the title…

But they let you offset the balance of your loan saving you thousands in interest!

Well I’m afraid there’s a better way to get your cake and eat it too.

Offset Accounts Are Pointless Wastes Of Money

mmm… cake

What is an offset account?

First off, let’s have a quick overview of what an offset account is for those of you who don’t know. As a quick example, say you have $10,000 in savings and a $400,000 loan @ 7%. You don’t want to put that $10,000 into your mortgage (for some reason) but want to “keep it around”. So instead, you get an offset account.

What the bank will gleefully tell you is that by paying more money to them, they’ll offset the interest of your loan by that $10,000. You’ll still have access to the $10,000 when ever you want, but the interest on your loan will be calculated on $400,000 – $10,000 = $390,000. So you basically save $10,000 * 7% = $700 per year in “offset interest”. Magical huh!? How could this NOT be good??

Why it’s all a load of shit.

Offset accounts cost you money. They cost you money by having a higher interest rate or they might even charge you a yearly fee (or both!). Now the bank will no doubt do magical calculations (as above) and go “Look! Even though we’re charging you $800 a year for this offset account, you’re going to save more due to paying less interest!” and they’re right. I’m a big fan of math and calculations and they are almost always right. However here’s the thing… you can get the benefits of an offset account without paying their stupid fees!

Getting your cake and eating it too

To get the benefit of paying less interest simply make an extra repayment on your mortgage with that $10,000. Now many people will assume that once it’s in your mortgage… you can never touch it again! But they’re wrong. It’s called “Redraw”, where you make a redraw on your mortgage. This just simply means you’re taking money back OUT of your mortage (instead of paying it off). Most mortgages these days have a $0 redraw fee which means… it costs you nothing to get that $10,000 back!

Simply ensure that your mortgage has a $0 redraw facility (note some may have a minimum withdrawal of say $1,000), stop paying for the “premium” loans that give you an offset account and plow all your extra cash into the mortgage. Maybe keep $2,000 or so in cash for bills and so on but everything else you can put into the mortgage. If there is ever a very major emergency that would require you to all of a sudden need $10,000, simply redraw that amount out of your loan. Within a day or two it’s in your account and you can get your cake and eat it too.

Does it really matter?

Lets take a top four bank example, the Commonwealth Bank. At that link (at the time of writting this post) you have a few choices. One is their “No Fee Variable Rate” loan that has a rate of 6.5%, it has no offset account but a $0 redraw cost option. Another option that has an offset account is their “Standard Variable Rate” loan with a rate of 7.01%.

Even if we’re generous and say that you pay your $400,000 loan off in 15 years with fortnightly repayments… the difference that rate costs you (which really we can consider to be the cost of having an offset account) is an extra 0.51% worth of interest which = $20,326.62

Is waiting two or so days any time there’s a major emergency and you need that $10,000 really worth $20,326.62 over 15 years? That’s $1,355.11 a year! Now yes, their “Standard Variable Rate” does include some other benefits along with the offset account but by God, are they really worth that much? I say no. Which is why we are on the simplest, no frills, lowest interest rate loan possible. We also pay $0 in fees and always have, this is something I’ll cover in another post later [this post in fact] but for now…

Your Tasks!

That’s right! You didn’t think you were going to get away that easily did you? For this post your tasks are a little more complicated as there are a few things that the bank can throw at you whilst doing this.

If you are considering switching banks entirely for a cheaper loan, please don’t do this and instead make sure your new loan is a simpler one instead.

1. Call up your bank and find out what type of loan you’re on. [5 mins]

  • If you’re already on the lowest interest rate loan with no offset account then awesome! You’re all done, go have a beer and start the BBQ.
  • If not, find out what your interest rate currently is and also how much it will cost you if you were to “re-finance” or change the loan type (note this is to change to another loan at the same bank, not go else where)

2. Now ask them if there is a simpler, cheaper interest rate loan they can switch you to and how much that would cost. [5 mins]

  • This should be the most simplest loan they have that also has a redraw facility, it would be wise and simple to look this up on their website before hand
  • Note: Some banks can charge a “fee” to make a redraw (eg. $50) however as redraw’s should only be done for emergencies, I’ve never found this to be a problem
  • The new home loan should still allow you to make any extra repayments you want. Make sure they don’t mind you paying twice, or even three times the “minimum repayments”

3. Weigh up the benefits. [30 mins]

  • Using the new interest rate of the simpler loan, calculate how much you’ll save each year by not having that offset account. This is simply the loan amount * the difference between the offset and non-offset loan interest rates (7.01% – 6.5% = 0.51% in our example) or:
  • $400,000 * 0.0051 = $2,040 saved per year
  • Now compare this cost to how much the bank will charge you to re-finance your loan. Chances are it might be a few hundred dollars in fees however as you can see, it’ll be nothing compared to the savings you’ll get in interest
  • Make sure you understand the features and benefits of both loans you are comparing, be sure to spend as much time as you need to fully take everything in

4. Pull the trigger [5 mins]

  • Call up your bank and ask them to switch your loan type (BAM!)

5. Leave a comment saying how much you saved by using this advice to encourage others to do the same [2 mins]

Total Time: 47 minutes.


CRUSH YOUR MORTGAGE IN 7 YEARS AND SAVE $300,000
     

7 Responses to “Offset Accounts Are Pointless Wastes Of Money

  • Rightyo,

    Your article is factually correct but it is not suited to everyone.

    What if you plan on making your home an investment property 3 years down the track? Using re-draw has massive tax implications where as offset accounts don’t.

    • Hey Sam thanks for the comment,
      You’re right, the information isn’t for everyone as that would surely be impossible to do! I try and cater for a target audience of people that wish to pay off their mortgages as quickly as possible. What they wish to do after this is accomplished (rent their house out or otherwise) is up to them.

      Renting your house out also entails a number of other different things that I also haven’t mentioned such as negative gearing knowledge, renter selection, insurance, fair rates and so on that the readers would have to also look into if renting their house out was their goal. I try and write my articles as complete and detailed as possible but at some point I have to draw the line as otherwise they’d go on forever. Your point is a good one to note though so thanks!

  • What about this loan?

    https://www.loans.com.au/our-loans/dream-loan-express

    Rough check:
    No annual fee has offset / low rate

    however
    only 5 free ATM transactions
    rate may not be aligned with RBA movements?

    anyway, seems like an OK deal

  • Your Name
    2 years ago

    There are many mortgage offset accounts that do not charge fees or higher interest rates. Don’t be pigeonholed in big banks that charge these fees and high rates. Do your research! Using redraw instead of offset can have future tax implications if you convert your home to an investment property.

    Example: CUA Fresh Start Loan has free offset no annual fees and lower rates than the big banks.

  • Hey there, you are right depending on the actual article. I think it is great that you make the point that they don’t come for free as they really don’t. But the fee is regularly worth it with the interest rates that come with it. But it really must be considered against a basic loan with redraw if there are no fees.

Trackbacks & Pings

  • How To Kill Commonwealth Bank Exit Fees | Mutilate The Mortgage :

    […] As you can see, the ones highlighted in bold can be set to $0 using this neat little trick. If you have more exit fees, there’s also a good chance that they will get waived too if they’re on the list mentioned in the quick Facts Sheet. That said though, this No Fee Variable Rate Home Loan is currently carrying a 5.90% interest rate which is quite highly competitive given there are no other fees, setup costs, annual charges, account fees and so on. It also allows unlimited extra payments so you can mutilate your mortgage and also has free Redraw facilities so there’s no need for an Offset Account. […]

    5 years ago
  • Going “All In” | Mutilate The Mortgage :

    […] explained in a previous post, Offset Accounts Are Pointless Wastes Of Money and should never be used. Instead you should setup your mortgage so that you have free access to […]

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