Do I really need a mortgage offset account?

Interest rate announcement – August 2016

Today the Reserve Bank of Australia met to review the official cash rate. After leaving rates on hold in July, the RBA have decided to cut rates to 1.50% this month (down 0.25%). We expect that most lenders will reduce their rates, in line with the Reserve Bank’s decision.

We are often asked by clients whether or not they should have a mortgage offset account. This month, we aim to demystify the relative merits of this account feature.

What is a mortgage offset account?

A mortgage offset account (MOA) is a feature that is included in many loan packages. The MOA operates as a full transaction account, similar to those that people usually use for their everyday banking. Often it includes such features as ATM access, full electronic banking and a cheque book.

A mortgage offset account is linked to one of your loan accounts. In most cases, it needs to be linked to a loan account that has a variable interest rate. The positive account balance of the offset account is added to the negative balance of the loan account to arrive at a ‘net debt’ figure. The interest charges on your loan are then usually calculated on this net debt figure.

Example:
Peter has a variable loan account balance of $500,000 at an interest rate of 3.79% p.a. Peter also has a mortgage offset account with a balance of $10,000. Peter’s net debt figure would therefore be $490,000 meaning that his interest charges would be calculated on a balance of $490,000; not $500,000. If Peter left the $10,000 in the mortgage offset account for a full year, he would save interest costs of $379 over that year.

Variable rate redraw facility

Most variable rate loan accounts now allow you to make additional one-off or regular payments. These additional payments can generally be withdrawn at any time, usually at no fee if transacted through online banking. Every loan is different so it is important to check your lender’s terms and conditions.

In addition, most variable rate loan accounts can be used as though they were an everyday transaction account. This means that salaries can be deposited into them and payments can be made from them.

Example:
Alison has a variable loan account balance of $500,000 at an interest rate of 3.79% p.a. Alison decides to make an additional one-off loan repayment of $10,000. Alison’s actual loan balance would therefore be $490,000 This means that her interest charges would be calculated on a balance of $490,000; not $500,000. If Alison was to maintain the account balance at $490,000, over a full year, she would save herself interest charges of $379 over the year.