Mortgage offset accounts are promoted as one of the most effective ways to reduce interest costs, but they often have higher interest rates and the majority come with fees.
Lenders know many borrowers will tick the box on the loan application for the offset account without thinking through how much money they would realistically be able to maintain in the account. Canstar calculates the extra 0.27 percentage points in interest and a monthly fee of $8 would require borrowers to maintain a balance of least $10,000 in their offset account, on average, throughout the 25-year life of the loan, just to break even.On a starting mortgage size of $500,000, the offset balance would have to be at least $6500 over the 25-year life of the mortgage, assuming a fee of $8 a month.
On a starting mortgage of $500,000, the offset balance would have to be at least $14,300 over the 25-year life of big bank mortgage, just to break even. The lowest rate mortgages generally do not have the option of an offset account, with the sharpest interest rates of these below 5.75 per cent, more than 1 percentage point lower than the 6.77 per cent for those with offset accounts, Mickenbecker says.
The “effective” rate of interest on the money in the offset account is the mortgage interest rate which, for most people on variable rates, will be about 6.68 per cent, he says.As the money in the offset account comes off the mortgage for the calculation of interest, but as no interest is actually paid, there is nothing to be declared to the Australian Taxation Office.
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