Is an offset home loan for you?

If you want to reduce the amount of interest you pay on your home loan, one option is an "offset" facility.

The way that this works is that, in addition to your home loan, you have a transaction account with the same financial institution. You deposit your income into the transaction account and use it for all your day to day expenses. Any money in this account is offset against the amount owing on your home loan and you only pay interest on the outstanding balance. So say, for example, that you have a home loan of $150,000 and you have a balance of $5,000 in your transaction account, you only pay interest on $145,000. Interest is calculated on a daily basis. It sounds like a great idea, a way that you can pay off your mortgage early and still have access to all your funds.

There’s no doubt that, providing you’re not paying any fee for the offset facility, its better to have than not have. The only problem is that, unless you can get access to all the features at a discount price (as you can under professional packages) offset accounts are only available at higher interest rates than home loans without this feature. If you look at what that higher rate is costing you, then it usually turns out that on any sizeable home loan you pay more for the higher interest rate on the bulk of your home loan than you save on the slight reduction in the home loan balance that the offset facility allows you.

I’ve attached a calculation I did for someone that compares two products, a basic variable rate product and a home loan from one of the major banks. As the calculations show, in this person’s case the offset account reduced the home loan balance by about $3,000 (actually this assumption was pretty generous to the offset account). That amounts to an interest saving of $178.50 per year. By contrast in the first year of the home loan the simpler product would save nearly $1,000 in fees and charges leaving a healthy net saving of $818. This saving would rise over time if re-invested in the home loan.

The other great advantage of an offset account is that you can pay your home loan off faster than the repayment schedule demands when you want to and then get your money back later on. But there’s another way to do that - a redraw. If the offset is a Mercedes Benz, a redraw is a Holden Commodore.

Competition in banking has meant that, although ‘basic variable’ rate products used to be very inflexible, if you know where to look you can now have the most important flexibility features. The basic variable rate product which I mentioned to the client enabled him to pay his home loan off as fast as he liked without penalty and it also enabled him to ‘redraw’ any excess he’d paid off from his home loan.

It is more cumbersome than writing a cheque. It requires a fax to the bank and the payment of a small fee of between $0 and $50 depending on the amount redrawn and the institution. But it’s a perfect standby if the client wants to get his house painted, or add an extension to his house, or put a deposit down on another house sometime in the future. You can even write the cheque at the auction. And when you get home or back to work you can fax the money into your account! No-one knows you don’t have an offset account, except your lender and you.
Cheers

Nicholas Gruen
( AKA Dr Peach)

20^th June 2001

Please note: These calculations are based on the best information provided to Peach in January and February 2002. They are provided as strictly indicative calculations. It is possible that rates for any of the costs charged differ from those provided in this calculation. This could be a result of human error, use of specific mortgage insurers other than those which may be encountered in a transaction , or changes in stamp duty and or other charges by governments of which Peach is unaware. Further some states may impose charges other than the ones outlined here. Generally these figures will be checked by your lender prior to approval and by your conveyancer prior to settlement. No responsibility is taken by Peach Home Loans for the accuracy of the figures provided.  Readers of this newsletter should not rely on any of its contents before checking first with Peach Home Loans or some other professional.  We deny to the extent possible by law all legal liability to any person who does not discuss with us their plans.   Borrowers should never assume that they qualify for a home loan will before receiving an unconditional loan offer from a reputable lender.

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