OPINION: The range of strategies that people use to run their finances is vast. At the bottom end of the spectrum are those people with no strategy at all. They spend what they earn and, often, more. At the other end of the spectrum are those who like to keep their finances separated in different categories. An account for holidays, tax savings, children’s education etc. If you are one of those people, and you have a mortgage, an offset mortgage account is almost definitely for you.
Almost everyone with a mortgage is celebrating the low-interest rates at the moment, but for savers, it’s terrible. At a mainstream bank, the best you could hope for would be 1.4 percent before tax and your money would be locked into a term deposit for at least six months.
But with an offset account, you could use those savings to lower the amount owing on your mortgage, therefore reducing the interest you pay.
For easy numbers, let’s say you have five accounts, each with $20,000 in them for a total of $100,000. All saving for various purposes - next holiday or your wedding etc. If you were to earn interest from a term deposit, the best you could hope for would be around $1000 in interest after tax.
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But if you made those five accounts into offset accounts, you could reduce your mortgage interest payments by around $4000 a year (assuming you are paying an interest rate of four percent). Unlike a revolving credit account in which you would need to put all your savings into one $100,000 account, with an offset mortgage you can keep your separate buckets.
And unlike a term deposit, your money is still available at any time which is extremely important in a Covid-19 lockdown environment where a lot of redundancies are happening. If you have a buffer on your mortgage, you must be able to get at it easily when times get tough.
There is one other huge benefit to offset accounts and it relates to the bank of mum and dad. Often parents want to help financially with their children’s mortgage but gifting them money ties up the funds that they may need as they approach retirement. But parents can nominate an account to offset against their children’s mortgages and the account is still in the parent’s names and accessible only by them. As per the example above, a parent with $100,000 could save their children $4,000 a year of interest payments (foregoing up to $1,000 of interest themselves) without ever having to hand over the money to the children.
In my opinion, this is a very useful but often under-utilised strategy by parents and can really help kids with their cash flow, especially in the early, more expensive years of a mortgage. I usually recommend the children pay the mortgage as though the parent’s money wasn’t there. This means they won’t panic if the parents withdraw the money and, in the meantime, pay down their mortgage a lot faster.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
