Mortgages with an offset account can end up costing you more

HOME loan customers could be leaving themselves short of thousands of dollars in savings by overlooking one key mortgage ingredient.

Offset accounts — a day-to-day transaction account linked to a home loan — can help customers reduce their monthly interest amounts by significant amounts by parking extra cash in there.

But new data from financial comparison website Canstar has found not all mortgages come with attached offset accounts, which means some customers are paying much more in interest than others.

The analysis found of more than 4000 home loans available, 64 per cent of variable rate loans have mortgage offset accounts.

For fixed rate loans they are less common — only 32 per cent have offset accounts.

The way offset accounts work is if a customer has a $350,000 loan and $10,000 parked in a 100 per cent offset account, they only pay interest charges on $340,000.

But there are traps — loans with offset accounts often cost more by having higher annual fees or interest rates and not all are 100 per cent offset; some balances only operate as partial offset accounts.

Canstar’s group manager of research and ratings Mitchell Watson said home loan customers need to pay attention to the fine print before signing up to an offset account.

“While on average home loans with offset accounts are more expensive, there are still some great home loans out there with 49 loans that have an offset account and interest rate that starts with a three,’’ he said.

“Of the 1870 home loans with an offset account, 527 charges an additional ongoing account-keeping fee — this can range from $5 to $16.50 a month.”

Reserve Bank of Australia data shows in 2015 Australians had $90 billion sitting in offset accounts.

Canstar findings showed customers would pay on average an extra 27 basis points on their loan’s interest rate if it comes with an offset account.

Calculations show a borrower would require more than $14,000 in their offset account to outweigh the additional interest charges.

Westpac, the nation’s second biggest lender, has one-third of their home loan customers using a mortgage offset account — a majority of who are owner occupiers.

Westpac’s head of home ownership Andy Wright offset accounts can be useful but they do not suit every customer.

“They can be beneficial for a range of home loan customers, particularly those who want the flexibility and convenience of having immediate access to their offset funds,’’ he said.

“Offset accounts provide flexibility, but if the goal for the customer is to simply pay down their loan as soon as possible and not retain access to additional funds, they may prefer to simply pay down their mortgage.”


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