By Phil Ringuet
Australian homeowners are loading up their offset accounts in record amounts, so much so that the average household is now almost four years ahead on their mortgage payments.
Quick question: do you have an offset account (or several) attached to your mortgage?
They’ve become quite popular in recent years, especially since the RBA’s official cash rate has hit record low levels and impacted the amount of interest you can earn in savings accounts (which we’ll explain in more detail further below).
But first, how much have offset balances increased?
Research from the Australian Prudential Regulation Authority (APRA), provided to The Australian, shows the average balance sitting in offset accounts is now nearly $100,000 – up almost $20,000 since the pandemic kicked off in March 2020.
In total, $222 billion was in offset accounts across the country as of September 2021 – up almost $50 billion from $174 billion in March 2020.
In fact, in the September 2021 quarter alone, offset account balances increased by 10%.
All of this has helped contribute to mortgage holders now being, on average, 45 months ahead on their repayments – up from 32 months prior to the pandemic.
In terms of the various ways Australians have gotten ahead, 57% of prepayments came from offset accounts, 40% via available redraw balances, and 3% through other excess repayments.
So what’s an offset account?
Basically, an offset account is a regular transaction account that is linked to your home loan.
The advantage is that you only pay interest on the difference between the money in the account and the mortgage.
Some banks allow you to have 10 offset accounts attached to your mortgage, too, with cards linked to them that you can use for everyday spending.
How exactly does it work?
Say you owe $350,000 on your mortgage, and have $50,000 in a savings account.
If you move that $50,000 into a full offset account, you’ll only pay interest on $300,000 (which is the loan value minus the amount in your offset account).
The offset account can then continue to be used for all your daily needs, like receiving your salary or withdrawing cash.
So why would you consider an offset account over a savings account?
With the RBA’s cash rate at record low levels, the interest rate you’ll receive on the balance in your bank’s savings account is also at record low levels too.
Say for example that you had a savings account with a 1% interest rate and a mortgage with a 2.2% interest rate.
By allocating money into your full offset account, you’d save more money on interest than you would earn in your savings account.
Additionally, interest on your savings accounts is subject to tax, whereas the interest-saving on your mortgage isn’t.
Is an offset account for you?
Of course, there are additional factors you’ll want to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.
And obviously, savings accounts and offset accounts are not the only two places you can park your hard-earned money. Depending on your risk appetite, there are other options you could consider that might yield a higher return.
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