The dirty secret of offset accounts
The vast majority of people that I deal with these days when looking into a home loan are always adamant they need an offset account.
This blog post is going to set the record straight about this ‘bells and whistles’ loan feature so you can make an informed decision next time you’re reviewing your loan structure.
The brief history of the offset account
Offset accounts became popular just after the peak of the disruption that was Wizard & Aussie Home Loans. These companies shook the market up undercutting the big 4, resulting in the largest swing away from these behemoths we’ve ever seen.
Now as we all know, the big 4 do not like anyone messing with their profit margins so they set about trying to find a way to differentiate themselves from Wizard & Aussie would make them unique.
Insert the offset account
The one problem that Wizard & Aussie had was that they were not deposit taking banks. This meant that they couldn’t offer savings accounts to customers.
Seeing this weakness, the bank’s crack product teams created a new type of savings account that instead of providing customers with an interest credit, would ‘offset’ interest charged on the home loan by whatever the balance of the savings account was.
For example, if the home loan had a balance $300,000 and the offset had a balance of $30,000 then the bank would only charge interest based on $270,000.
This ‘special feature’ has been touted to customers ever since and the banks have been so good at it that now a lot of people won’t accept a home loan if it doesn’t come with an offset account
The reality of an offset account
I let you in on a little secret when it comes to the offset account…
If you simply pay down the loan by the same amount as is in the offset account, you get the same benefit.
Crazy I know but that is the reality.
Now I know that some people will talk about other benefits that an offset account has such as allowing a separation of interest against investment properties etc.
But the reality is for someone who is simply looking to pay down their loan, I don’t see why you’d pay a higher cost and an annual fee just to have this feature.
Even today, there are many lenders who don’t offer offset accounts. Doing this allows them to have a lower cost of funds to run their company, meaning that they can offer more competitive rates.
Just something I thought you should think about next time you have your home loan reviewed.
Until next time!