Monday, November 28, 2011

Off-set account – not right for all cases

An offset account is like a reverse savings account.  Instead of earning interest on the balance, you save the corresponding interest on your home loan.  So if you have $5,000 in your offset account, you are not going to pay interest on $5,000 which is sitting in your home loan. 

There are different type of offset account - some offer you 100% offset, but there are others that give you a lower percentage offset - so make sure you read the fine print.

Using your offset account correctly can save you hundreds, even thousands of dollars over the term of your home loan, but make sure that you do your sums first.  Don't just get an offset account because you think it's the right thing to do.  Most offset account carry a fee and you need to be sure that the saving outweighs the cost of having an offset account.

Simple examples:
  • If your 100% offset account cost is $10 per month, so you need to save more than $120 in interest each year for it to be worth your while. To save $120 per year in interest you would need to maintain a balance of no less than $1,600 - not actually that hard if you use it as your only bank account.
  • If your 100% offset account costs you $300 per year you'd need to maintain a balance of over $4000 for it to be worth doing.
  • If you have a 50% offset account that costs you $200 per year you will to maintain a balance of over $5,550 for it to be worth doing.
So do your calculations and read the fine print before you sign up for an offset account and make sure that the offset will, in fact, save you money and not cost you money. 

If you do the calculations and work out that an offset account would work for you use your offset account to the max - make it work for you.  Use it as your only bank account and keep as much money in the account for as long as possible.  The best way to get the most from your offset account is to stop using all other transaction and savings accounts.

If you are saving for a something specific, it may be worth keeping a separate account so that your savings are not 'lost', but if you can manage your money in a single account - do so now and you could save.

Make sure all your income goes into your offset account. If you are a couple with separate transaction account, think about combining your efforts and use the offset account as a join transaction account with ALL income going into the offset account.  Have all salary, dividends, bonuses - everything paid directly into your offset account.

Keep the balance as high as possible for as long as possible. Pay bills on time – not early! 1 day before the due date is generally OK for BPay and EFT transfers, but it depends on your bank so make sure that you do not pay too late, but definitely do not pay your bills a week or 2 early.

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.