Tell a friendImportant
If you haven't read our Offset tutorial, you should start there to ensure you have an understanding of how offset works.
Fact:
If you don't make extra repayments (payments above the minimum repayments) and you don't have offset features, you will take the full term of your mortgage to pay it off. Used properly, these interest saving features can save you thousands in interest and wipe years of debt from your mortgage.
Whilst it is true that offset facilities and extra repayments can have a dramatic effect on the amount of interest you pay and the time it takes to repay your mortgage, be wary of any person suggesting that you will repay your mortgage in 15 years or less without increasing your repayments by at least 30%.
The three main offset features available on mortgages in Australia are extra payments/redraw; offset accounts and all-in-ones. If you don't want to spend the next 30 years repaying your mortgage, you must take a moment to understand each of these features and develop and implement a solution that works for you.
Extra repayments and redraw only
Most variable home loans allow you to make extra repayments and redraw (the ability to withdraw your extra repayments if you need to). This is the most basic interest saving feature available. Money is deposited into your mortgage either by salary crediting or by transferring money from a bank account. To redraw, the reverse is done and you transfer money from your mortgage to your bank account, usually via internet or telephone banking.
Advantages:
The main advantage is the clumsiness associated with this type of facility.
You cannot access your extra repayments quickly or directly. The temptation of withdrawing money via ATM or EFTPOS doesn't exist as you can't do it. Even if your bank account and mortgage are with the same institution, redraw usually requires internet or telephone access to transfer the money, although some require a faxed confirmation from you as well!
Once you initiate a redraw, the money stops offsetting your mortgage interest and enters limbo for up to 48 hours before it arrives in the account where you can access it. Consequently, you are discouraged from redrawing extra repayments on a regular basis and these funds are left where they are probably doing the most good - reducing the interest you pay and the time taken to repay your mortgage.
Disadvantage
The main disadvantage is the clumsiness associated with this type of facility.
Even in the most streamlined redraw arrangement can result in funds in limbo each time you deposit or redraw. Time spent in limbo = money that you haven't saved in interest. Worse still, the challenges in accessing redraw can discourage you from depositing as much money as possible and moderates the funds that offset your mortgage.
Beware of
- Mortgages requiring a fax notification to activate redraw
- Redraw fees
- Limits and conditions on redraws
- Mortgages that do not allow direct salary crediting
- Lenders claiming this type of facility to be the same as an offset account or all-in-one
- Myths that claim offset accounts are a more expensive option
- Lenders not offering their own bank accounts to simplify transfers
Mortgage offset accounts
Mortgage offset accounts are every day banking accounts offered by your lender, which are separate to your actual loan account, but linked for the purposes of calculating the daily interest. A good mortgage offset account eliminates the need for you to have separate bank accounts, which reduces the cost to you in time and fees in managing these accounts.
Generally speaking, your mortgage offset account should be accessible via internet, telephone banking, EFTPOS and ATM. Some also offer cheque book and branch access. Which is the most important to you comes down to what suits you and how you see yourself using this account. A good mortgage offset account allows you to direct credit your salary, auto debit mortgage and credit card payments and bPay your bills.
Advantages
For most people, an offset account replaces the need for any other bank account, which simplifies management and reduces fees you would pay elsewhere in your budget. The main advantage is that every cent in your offset account is working to reduce the interest and time taken to pay off your mortgage. Every day, 24 hours a day.
A strategy by smart borrowers is to use their offset account as the main transaction account and arrange regular lump sums to be transferred from the offset or direct salary credited to their mortgage, which then acts as a savings account, as the extra money is out of sight, but not completely out of reach in case of emergency. Using this approach, both savings and money readily available in the offset account offset mortgage interest.
Disadvantages
There is a perception that you have to pay extra for an offset account, however when you compare similar quality lenders and mortgage products, this is untrue. Some basic variables offer 100% offset at no extra cost. If you are borrowing more than $250,000, packaging often results in the inclusion of an offset account and interest rates for full featured mortgages around or below those of reputable basic variables.
Beware of
- Limitations on accessing your offset account
- ATM and EFTPOS fees - although some lenders even waive foreign ATM costs
- Comparing a basic loan and forgetting regular banking costs that will be replaced by the offset account
- Lenders not offering offset accounts 'educating' you about offset accounts
All in one mortgages
All in one home loans are mortgages that also operate as everyday banking accounts. The two most common forms of these types of facilities are either Loan Transaction Accounts or Lines of Credit. Of these two, a line of credit is normally the most flexible and accessible, however there are some dangers and additional costs that may be associated with this type of mortgage. You should not take one out without first reading the line of credit tutorial.
The second type of all-in-one less commonly available is a Loan Transaction Account (LTA). This type of mortgage is a hybrid between an offset account and a mortgage where your loan account actually becomes your primary banking account.
Important: At least one major lender has limitations on their offset account that may render it ineffective. You may be recommended a split loan with a small line of credit to overcome these limitations when dealing with this lender or lenders like them. In these cases, keep your line of credit split as small as possible. It should be no more than $20,000 unless you have specific reasons for a higher limit.
Advantages
Like a mortgage offset account, an all-in-one replaces the need for any other bank account.
Disadvantages
The main disadvantage to an all-in-one mortgage is the combination of transactions, savings and debt into a single account can make it very difficult to budget or easily monitor the effectiveness of this strategy or your ability to save. Unlike a mortgage offset account, you cannot quarantine savings into your mortgage.
Lines of credit also have their own risks and many people who take out a line of credit for all of their borrowings do not make any progress on repaying their mortgage at all, let alone faster.
Loan transaction accounts may also have limitations that prevent scheduled payments and transfers and similar transactions that are more readily available from offset accounts.
Beware of
- Access fees
- Free transaction limits (such as 5 per month etc)
- Restrictions on bill payment and transfer scheduling
- Debt reduction salespeople who suggest repayment of your mortgage in 15 years or less
- All-in-ones being passed off as being the same as or better than mortgage offset accounts
