Ask Kochie: what’s the deal with mortgage offset accounts?

Should I keep all of my savings in a mortgage offset account, or is it better to keep a separate savings stash in a high interest savings account?


While those in the know might think this is a simple question, the answer actually has two parts to it. The first part is easy… yes, it’s better to keep your savings in the offset account (or a redraw facility, which is a similar concept).

Money in an offset account serves to reduce the principle component of your home loan, meaning you’ll save big on interest and will pay off your loan faster.

For example, say your mortgage interest rate is 5.5%; money in a 100% offset account is effectively earning a guaranteed after tax return of 5.5% each and every year.

 

Say your mortgage interest rate is 5.5%; money in a 100% offset account is effectively earning a guaranteed after tax return of 5.5% each and every year.

 

Not bad considering you’re lucky to find a high interest savings account paying 3% at the moment… plus you have to pay a chunk of that to the ATO come tax time.

A typical strategy to make the most of an offset account is to keep all of your money – savings and income – in the offset, and cover day to day expenses on a credit card which is paid off in full via the offset every month.

But here’s where the second part of the answer comes in; many people we speak to say keeping all of their money in an offset account just doesn’t ‘feel’ right.

For starters, it’s harder to keep track of your spending when it’s all caught up in the offset account. And when there’s so many debits and credits going on in the account, you don’t get that warm and fuzzy feeling of watching your balance climb steadily each month.

We spoke to Brenton Tong, financial planner and founder of Financial Spectrum, about this.

And while he agreed mathematically the offset account is the best place for your savings is, he realises it can be unsettling to not have a clear picture of where your money is going.

The solution, according to Brenton is to get organised. Set up a budget and keep track of your spending independently.

And, he says, look into your options. “Some lenders allow you to keep multiple offset accounts, so you could have a ‘savings’ offset and a ‘spending’ offset. This could help you budget more effectively if you need to keep your money separated.”

  • An offset account can help you save on interest and pay your loan off faster.
  • It’s still important to budget and keep track of your spending.
  • Look for offset accounts which are 100% offset against the loan balance.
  • Other desirable features include unlimited withdrawals and no balance limits.
  • Always pay off your credit card in full every month.