Savings accounts vs offset: Where to stash your cash
The rise of interest rates continues to weigh on Australian homeowners following nine months of continuous hikes.
Many mortgage holders have seen their monthly repayments rise by more than $1000 in the nine months to February.
So where can homeowners with some extra cash get the best return on their money?
High-interest savings accounts
The big banks have passed on all the interest rate rises in full for home loans but haven't been quite as generous to savings accounts.
However, savers have felt some of the benefits, with some accounts now offering 3-5% p.a. as long as certain conditions are met.
The ING Savings Maximimiser currently has the highest bonus rate account according to Mozo at 4.55% however certain conditions must be met including a $1000 monthly deposit and five card purchases a month.
ANZ's Save account, Australian Unity's Freedom Saver and Bankwest's Easy Saver all offer a rate of 3.75% without meeting any conditions.
But for homeowners is putting extra money in a high-interest account really the best option or should they look at offset accounts?
What is an offset account?
An offset account is simply an everyday bank account that is linked to your home loan.
You can deposit your savings into the account and that balance is offset against the amount owing on your loan, reducing the amount of interest you pay on your home loan.
Because the offset account acts like an everyday account, you can still access that cash whenever you need it, even while it's working to reduce your overall payments.
Michele Mansfield, senior broker at Equity Vision in Victoria, told Money that offset accounts were an untapped resource for homeowners.
"Offset accounts can be a significantly better option for many homeowners over a savings account, but many don't understand them and therefore don't use them," she says.
The advantage of them is that it's your cash and it's protected by the government's guarantee on deposits she says.
Benefits of offset accounts
"Putting money into a savings account will grow its value which could be around 4% now, but then you must pay tax on it. If you have $10,000 and you earn $400 on it and then you'll pay tax on that," says Mansfield.
"On an offset account you won't earn a cent so there's no tax, but you will save on your home loan interest every month."
Homeowners do still have to meet the minimum monthly repayments but reducing the loan will help you to pay off the loan quicker.
Oliver Studdy, a mortgage broker at Azura Financial in Sydney, agrees with Mansfield, saying offset accounts can be a fantastic way to utilize your money.
"You do still have to pay your minimum monthly repayment amount but you can just reduce your interest expense so you can pay off your loan quicker," says Studdy.
However, young people at the start of their loan may prefer the cash flow.
"Someone may not have much money left after settlement and want to put every dollar into a high-interest savings account to generate that cash flow," he says.
How the numbers compare
Sally Tindall, research director for RateCity.com.au, says there can be significant savings from putting money in an offset versus a savings account.
"If someone put a lump sum of $50,000 into one of the highest rate savings accounts in the market, and then contributed an additional $500 every month for thereafter (total contribution of $55,500) they would earn an estimated $1487 in interest, after tax over the next 12 months. This assumes they are taxed at 0.45 cents per dollar, that the cash rate peaks at 3.85% as forecast by Westpac and that the bank passes these future hikes on in full," she says.
"If the person instead put it in an offset account attached to their home loan on a current rate of 5.74%, they could potentially save $3340 in interest over the next year. That's an extra $1853 in savings when compared to the savings account."
Tindall says offset accounts could help bring down your total interest every month, but you have to read the fine print.
"Owner-occupiers should make sure they are not paying excessive rates and or fees for the offset account as this can easily negate how much savings you make from having money in the account. In fact, in some cases, you could end up paying more on your home loan when compared to a cheaper product with no additional money in your loan."
Borrowers can also consider a redraw facility rather than an offset account.
While an offset is a separate transaction account, a redraw facility allows you to take out any extra money you might have paid into your loan.
"The big positive about a redraw facility is that they are often cheaper... but do come with their own set of drawbacks. It's harder to maximise every dollar you own as it is reliant on you transferring money back and forth when you need it," she says.
Some banks even charge a fee to redraw your money and limit the number of times you can do this.
The highest redraw fee on RateCity.com.au is $4100 per redraw with a minimum amount of $5000 but many lenders on the database don't charge a fee.
Things to look for
Tindall says there are four things to look for when considering an offset account.
- Firstly, decide whether an offset account is right for you. This will depend on a range of factors such as whether you're an owner-occupier or an investor, how much money you are likely to have spare and whether you're more likely to save it in an offset or spend it, and what rates you are being offered. There are pros and cons to both so weigh them up carefully.
- If you decide you want an offset, shop around for one that comes with a decent interest rate. If you end up paying significantly more for the account, and don't put a substantial amount of money in it, there's a chance you could end up paying more. Find a lender willing to offer you an offset account at a better price. Most banks charge more for offset accounts but there are good deals out there, particularly if you're willing to bargain.
- Fixed rate loans typically don't come with offset accounts or the ability to make significant extra repayments.
- Check if your offset is a full or partial offset account - full offsets give you more flexibility.
Mansfield says if you had a broker this was the time to engage them and get them to help you save money.
"That's what they are there for, to do the leg work to help you get the best option for your money."
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