Mortgage offset accounts can leave you worse off

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Sharp marketing on some mortgage offset accounts means homeowners need to be on their toes.

Lenders know most people who have heard of offset accounts think they are always a good idea.

And when they sign-up for a mortgage with a lender, many home buyers are likely to tick the box for the offset account on the loan application form without paying attention to the fine-print.

However, among other things, sometimes a mortgage with an offset account can have a higher interest rate than a mortgage without an offset.

Mortgage offset accounts definitely can be a good way to get ahead on the mortgage while parking savings that can be withdrawn if needed.

Mortgage offset accounts are not created equal

Mortgage offset accounts are not created equal

Photo: Wayne Taylor

 

That’s because money in the offset account reduces the mortgage and therefore the amount of interest paid.

The “effective” rate of interest on the money in the offset account is the mortgage interest rate.

With many home owners paying a mortgage interest rate of least 4 per cent, that’s a much better rate than could be earned elsewhere, for example, on term deposits, where the money is locked away.

Another advantage of offset accounts is because the money in the account comes off the mortgage for the calculation of interest, nothing has to be declared to the Tax Office.

Savings held in a term deposit, for example, as well as paying less than an offset account, would require income tax to paid on the interest.

However, a recent report by comparison site Canstar shows the extent to which offset accounts are not created equal.

For starters, some offset less than 100 per cent of the mortgage. A 50 per cent offset account, for example, would pay an effective interest rate that is half the interest rate on the mortgage.

Canstar says offsets accounts that are less than 100 per cent are more likely to be found among “basic” variable home loans rather than standard variable home loans.

Having an offset account that is less than 100 per cent is not the only thing that homeowners have to be wary of.

That’s because money in the offset account reduces the mortgage and therefore the amount of interest paid.

The “effective” rate of interest on the money in the offset account is the mortgage interest rate.

With many home owners paying a mortgage interest rate of least 4 per cent, that’s a much better rate than could be earned elsewhere, for example, on term deposits, where the money is locked away.

Another advantage of offset accounts is because the money in the account comes off the mortgage for the calculation of interest, nothing has to be declared to the Tax Office.

Savings held in a term deposit, for example, as well as paying less than an offset account, would require income tax to paid on the interest.

However, a recent report by comparison site Canstar shows the extent to which offset accounts are not created equal.

For starters, some offset less than 100 per cent of the mortgage. A 50 per cent offset account, for example, would pay an effective interest rate that is half the interest rate on the mortgage.

Canstar says offsets accounts that are less than 100 per cent are more likely to be found among “basic” variable home loans rather than standard variable home loans.

Having an offset account that is less than 100 per cent is not the only thing that homeowners have to be wary of.

Source; https://www.smh.com.au/money/borrowing/mortgage-offset-accounts-can-leave-you-worse-off-20180323-p4z5yi.html

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