30 October 2000
Mortgage offset accounts can cost money instead of providing savings, because you often pay a higher interest rate for the feature.
Many homebuyers, particularly those on low to middle incomes, are not getting value for money with these loans, according to research by online mortgage broker iSay.
"For people buying their first home and scrounging around for every bit of cash, they should really look twice at these accounts," says iSay chief executive Martin Collings.
He says people can be better off choosing a basic variable loan, which is often about half a per cent cheaper, rather than a product with all the extras.
"People often forget that the most basic home loan offers the lowest rate," says Louise Petschler, a finance policy officer with the Australian Consumers' Association.
Ms Petschler says you should assess the range of benefits a loan offers and see if they are helping you reach the goal of paying it off as quickly as possible.
The banking and finance director at mortgage tracker Cannex, Cassandra Williams, recommends weighing options to see if the extra features of a mortgage offset account will be of use.
"The greater the level of access to your money, the more you will pay for the interest rate," Ms Williams says.
But she urges homeowners to keep an eye out for some of the cheaper loans that still offer features such as offset accounts and redraw facilities.
If you want your salary paid into your account and want to live off the mortgage, you might be better off paying a slightly higher rate, she says.
According to Mr Collings, an average offset account balance of $9000 is needed to break even on an average $150,000 mortgage.
"Offset accounts are popular as they allow a person's salary and savings to reduce the monthly interest on their mortgage," he says. "However, while offset accounts make a lot of sense for people on higher incomes or with a good savings capacity, the truth is that many people on lower incomes end up paying for a feature they will never get the benefit of."
He points out that lenders do offer special deals on offset accounts, but says borrowers should ask questions and talk to someone who can do the sums.
"The main benefit of the offset account is that your salary is paid directly into this account and you are earning tax-free interest at the same rate as the interest charged on your mortgage," Mr Collings says. "The downside is that these loans are typically more expensive. For Westpac/ Bank of Melbourne/ Challenge, the differential is 56 basis points, and for Homeside (owned by National Australia Bank) the differential has recently been reduced from 52 basis points to
40 basis points.
"The BankWest product with full offset is 39 basis points more expensive than its basic variable (no offset) offering."
He says offset accounts have become popular over the past five to 10 years because of their tax savings. But home owners might be better choosing a cheaper product and putting their savings towards extra repayments on their mortgage.
"Why pay for features you will never use, when the objective for most homebuyers is to get out of debt as quickly as possible," he says.