Aussie mortgage holders are paying a premium for offset accounts and it’s leaving them thousands of dollars worse off, according to new research.
Canstar analysis found home loans with offset accounts had 0.39 per cent higher interest rates than basic loans with redraw facilities, with market averages sitting at 6.34 per cent and 5.95 per cent, respectively.
The difference in rates is even more pronounced for three of the Big Four banks, where having an offset account can see borrowers paying up to 1.43 per cent higher interest rates. Commonwealth Bank is the only one that doesn’t charge a higher rate.
Canstar finance expert Steve Mickenbecker said paying a significantly higher interest rate for an offset account was now “almost impossible to justify”.
“Redraw facilities and offset accounts are essential loan features, giving borrowers the confidence to effectively make extra loan payments and shorten the term of their loan and reduce interest paid,” Mickenbecker said.
The main difference is that an offset account functions like a separate transaction account. Borrowers can get their salary deposited into the account and it offsets the balance of the home loan.
“Offset is slightly more favourable than redraw, in that transactional balances can also act to reduce interest on the loan, and much of the banking industry treats loans with offset as a premium offering,” Mickenbecker said.
$14,113 at stake
Canstar calculated the difference between the average offset and redraw home loan. It found that an average couple - who deposited their joint income of $11,851 into their offset account each month and fully spent it - would be thousands of dollars better off by opting for a lower-rate home loan with a redraw facility instead.
The couple could stand to save $39 per month in interest, adding up to a whopping $14,113 in total interest paid over the life of a $500,000 loan taken out over 30 years.
ANZ, NAB or Westpac customers could save even more - blowing out to $99,208 or $276 per month if they shifted to a home loan with a redraw instead of an offset account.
“At three of the Big Four banks in particular, there is such a large interest rate premium put on offset accounts that it becomes difficult to imagine a borrower choosing that option,” Mickenbecker said.
“To make offset a logical choice at some of the big banks, a borrower would need an abnormally high level of income relative to the size of their loan, to such a degree that you would wonder why they have the loan at all.”
Mickenbecker encouraged borrowers to look at their home loan and evaluate whether they were getting value from it.