Are offset accounts worth it?
Tuesday 14 February 2012
Picking just one of the 639 home loans currently listed on Mozo can be a daunting task. Establishment fees, deferred establishment fees, fixed or variable rates, redraw facilities blah blah blah!
One of the classic decisions facing anyone picking a home loan is whether or not to go for an offset account. Sure, the loan may have a higher rate but in the long run you’ll be much better offâ€¦ or so the bank manager will tell you.
Despite having the best home loan comparison tools in the universe, not even the Mozo site could answer this question, so the Rate Chasers put on their maths caps and did some analysisâ€¦
Looking only at the Big 4 (to save ourselves going nutty) we compared the price – including rates and fees – of home loans with and without an offset facility and on average, you can expect to pay a premium of roughly 0.6% for the privilege.
Great. But what does that mean?
An offset account is like a bank account where you can dump your cash (read: wages) to decrease – or offset – the loan balance on which you pay interest. Lower balance = lower interest. Simple, right?
Comparing two NAB home loans will help us illustrate: the NAB Base Variable Rate home loan has a comparison rate of 6.77% p.a. and does not offer an offset account. NAB’s Tailored home loan has a comparison rate of 7.35% p.a. and is exactly the same except for the inclusion of an offset facility.
Based on a $300,000 home loan, the higher interest rate would cost you $1,740 extra each year, which is basically saying you pay $1,740 to have an offset account. That’s one expensive bank account.
Now things get tricky.
To cover this cost, you need to ‘offset the offset’ by having a stack of cash in your offset account. And we do mean a stack of cash. In our example, you would need close to $25,000 of cash in your offset account in year one of the loan just to cover the cost of the higher rate – that’s about 8% of the total loan amount.
Now this may be a slightly extreme example, as there are many great value home loans (see below) that offer offset accounts – but it is a scenario indicative of what you may face from an energetic up-selling loan manager.
Offset accounts can be a great way to save money at a rate not afforded by savings accounts (not to mention the tax benefit!), but make sure you do your sums first.