Australia: Should mortgage holders have an offset account?

Mortgage offset accounts are a type of transaction account which borrowers can use to reduce the amount they pay on their mortgages: any funds held in the account are deducted from the outstanding balance when calculating interest payments.

The accounts have thus been pitched as a useful tool for saving money, particularly when you consider that interest rates offered by savings accounts are below the rates paid for a mortgage.

However, borrowers should also consider that offset accounts are a premium feature, and they will often pay fees to have access to one. This reduces the viability of the account: A borrower who pays $400 per year to have access to an offset account would need to hold $10,000 in the account to break-even at a mortgage rate of 4%.

This same money in a savings account would have earned a lower interest rate but would not have been subject to any fees. Despite the costs of a mortgage offset account, borrowers do value having access to this feature.

According to RFi Group data, mortgage offsets are the fifth most important consideration borrowers have when choosing their lender; interest rates, broker recommendation, fees and an existing financial relationship all ranked higher.

Furthermore, close to a half of all recent mortgage holders have an offset account, with the majority of these using their offset as their primary transaction account. Younger borrowers are more likely to make use of offset accounts compared to older borrowers.

For these borrowers to get value out of their accounts, they would need to evaluate how much they should hold in their offset account to compensate for any fees and determine whether this is viable for them.

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