Simon asked us to talk about the benefits of an offset account. What it is and how it is best used? We turned to Andrew Mirams who gives all the detail.
Kevin: I want to answer a question that came in from Simon at Caulfield. Simon asks about an offset account. Could we please explain what it means? We mentioned it in the show on a few occasions. Joining me on the line to discuss that, Andrew Mirams from Intuitive Finance.
Good day, Andrew.
Andrew: Hi, Kevin. How are you?
Kevin: Good, mate. I shot that question to you from Simon. Just explain for him what an offset account is, mate.
Andrew: I think it’s a good question because still, it appears that the offset accounts and do they really work are common questions that we get asked quite regularly.
The first point is what is an offset account? Traditionally, it’s now basically like your savings account. A lot of people will have a second savings account or something like that, but it can just be your normal day-to-day savings account. What we do is we take them, we attach it to your loan, and then whatever the balance is sitting in that account actually fully offsets against the interest you pay on your loan.
Let’s just say, for example, you have a $500,000 home loan and you have a balance of $10,000, it’s effectively saying you only pay interest on the $490,000, so it saves you the difference between what you have in savings and what you have in the loan.
Kevin: Mate, are there any questions that someone should ask themselves before they step into one of these, an offset account?
Andrew: Yes. I think wherever you’re going into a normal package or something, if you can get an offset, we’re big advocates of them because we see the ease of management, so not having to shuffle money around. All your money goes into the account and effectively starts working for you to assist you to reduce your loan interest. So, I think they are great things.
But at the same time, you have to watch. The banks sometimes will charge you a fee for having it. Sometimes the rate might be slightly higher, so you have to make sure that you have to be able to justify the benefits.
If you never have more than $100 in your account, it’s probably not worth having an offset account. But if you tend to sit on thousands of dollars from month to month, or you’re a good saver and you’re regularly adding more money, absolutely, I think an offset account is a great facility to have to help you reduce your interest on your loan.
Kevin: In the event where an account may vary quite a lot – lots of ins and lots of outs – is there any advantage in having an offset account in that situation, Andrew?
Andrew: It tends to just depend on the average balance. Our high income earners, a lot of them get paid on a monthly basis, so they get a big lump sum once a month and then they slowly work their way through their living expenses to the end of the month, and it can diminish. That’s very normal.
While you have all of that money in your account, it’s like paying off your loan, just living out of your loan. That’s kind of what it is. If you have a reasonable fund going there, I think it can definitely save you interest.
To give you an example, Kevin, just say you had a $500,000 home loan at an interest rate of 4% and you just had $10,000 sitting there as an average balance offsetting against it. Over the life of the loan, that’ll save you just shy of $23,000. I know I’d rather have that in my pocket than in the bank.
Kevin: Absolutely yes. There’s a good demonstration. We’ve had a number of questions about this, and I think you said it at the outset too, that offset accounts is one thing that you’re asked quite regularly about.
We’re also asked about loan redraws. We’re out of time right now, but what I would like to do is do a special interview with you on that. We might actually do that as a video, Andrew, and then we can post that up on your website, on your channel on Real Estate Talk as well.
Andrew: Absolutely. I think that’s a great idea because there are some key differentials that you need to understand.
Kevin: Watch out for that. It’ll be on Andrew’s channel. We’ll put it up there for you this Sunday, actually, the difference between offset accounts and loan redraws. That’s on the Intuitive Finance channel on Real Estate Talk. Just have a look for it. That’s what we’ll call it: “What’s the Difference Between Offset Accounts and Loan Redraws?” You can just put that into the query box.
Andrew, thanks for your time, mate, and we’ll catch you again soon.
Andrew: My pleasure, Kevin. Have a great day.