Avoid these 5 offset account mistakes

Common offset account mistakes I see

Being a mortgage broker since 2008 has given me insights and experience too valuable to keep to myself.

Offset accounts are common loan feature for Australian borrowers. Used correctly, they can be a powerful tool to offset home loan interest—and accelerate your home loan pay off trajectory.

I am highlighting the mistakes I have seen borrowers on their own home loans in my experience as a mortgage broker.

Sure, there might be exceptions to these mistakes that make it an appropriate strategy for some situations, but when I pointed out these mistakes to my own clients—they were embarrassed, annoyed, angry – so I figured I tell you about them.

If you can learn, better still save money – it is worth it to me. I put together a video that covers these mistakes below.

Offset accounts – Quick recap

Offset accounts can help offset home loan interest. Given home loan interest is calculated daily, offsets are a great example of money never sleeping.

By avoiding these mistakes, offset account holders can ensure their money is always working .

Small mistakes can add up to significant financial setbacks. In this article, I’ll discuss five common mistakes I have seen borrowers make with their offset accounts and how to avoid them.

Mistake #1: Offset account not linked

One of the most frequent errors I see is that the offset account is not linked to the home loan.

Most lenders treat home loans and offset accounts as separate accounts — they usually have different account numbers—so the lender needs to link them for the borrower to receive any benefit.

This is because offsetting is usually considered a “feature” available to many home loans (usually for a fee). So, it must be enabled – “switched on” – by the lender for it to work.

If the offset account and home loan is not linked, the borrower misses out on offsetting the home loan interest – and any cumulative interest savings benefit an offset brings.

Take an example of a 30yr, $600,000 home loan with principal and interest repayments and a $50,000 LINKED “offset” balance.

• Each night the lenders will tally the interest owed – the first night $8 is saved
• Over the first month, the offset benefit is $250
• Over the first year, the offset benefit is $3,083
• And the total benefit over the first two years is $6,314

In a nutshell – For home loans with principal and interest repayments offsetting can enable a little more principal loan reduction each month. So, by having a linked offset account, each month can return more than the last because in addition to the interest offset, the principal loan balance can reduce more quickly.

Why does it happen?
Sometimes the link never happens. Computers, people, forms – there are so many reasons why it might not be linked. It is something a borrower should always follow up on after a loan has been established.

Sometimes bank staff open up the wrong type of account – where an offset link is never possible because the account was not designed to have an offset feature, or perhaps a name mismatch.

Other times borrowers make a change to their loan or offset account – and lose their offset account link in the process.

How to avoid It
The best way to steer clear of this mistake is being vigilant. Any interaction or account variation made with a lender should also see you get confirmation of your current offset position.

Many lenders will have an offset indicator on their online banking platform so you can see the link exists.

Don’t assume lender knows what you want – this is something borrowers need to proactive with.

If in doubt, see a broker. Licensed brokers understand bank-language.

Mistake #2: Too much money in offset account

Another mistake I see is too much money in an offset account – can you believe it?

A good problem, great savings, they just lost track.

Yes – too much money can be problem.

I’ve seen borrowers with multiple home loans offset $150,000 against a single $100,000 home loan.

On one hand, they are not paying any interest on that home loan because the $100,000 is fully offset.

But the downside for these borrowers? The extra $50,000 was not doing anything for them.

These borrowers had another home loan they could have been offsetting.

A good problem, great savings, they just lost track.

How to avoid It
If you have too much money in an offset account, and have other home loans you want to offset interest on – many lenders offer more than one offset account pairing.

This could be a case of talking with a broker or financial planner to see what options you have for your “spare money”.

Mistake #3: Spending offset account money

Some borrowers are good with repayments but not so good with spending.

Given offset accounts usually operate like everyday transaction accounts, easy access to money could be a problem for spenders.

Offsets can come with higher fees and rates, so you need to have some financial discipline to make them work. There are other products with loan features better suited to spenders to stash their cash – like redraw.

How to avoid It
Your home loan structure with offset might have suited you at the time, but offset accounts are not for everybody – and financial positions change. That is why I like to use the term “financial journey” – if it were predictable it would be easy.

Unless you can demonstrate a capacity to save in your offset account it might be worth a review of your home loan. I have moved many borrowers away from offset into a basic home loan structure that still offers a redraw facility—a place to keep spare savings, have it accessible, and still save on home loan interest.

Mistake #4: Not using offset account

I have lost count of how many times I met a borrower who had a lot of savings, but the savings were at another bank, so not in the offset account linked to their home loan.

The result? They were earning less interest in the other banks “savings account” than they could have offset on their home loan.

Some borrowers said they do this to avoid spending the money in their offset which I thought was a fair point – but it seemed an extreme, and costly, method of saving.

How to avoid it
If you have an offset make sure you know why you have it and how it works. Or, consider a home loan structure that better suits you. Having an offset account (and the potential of higher fees and interest rates), only to not utilise it, can be costly.

Mistake #5: Offsetting the wrong loan

I have met with many borrowers who are clear on their goal to minimise interest on their owner-occupier home loan using an offset account.

But when I looked further into their situation, they had mistakenly linked their offset (and interest saved) to their investment loan.

How to avoid it
This often happens when borrowers own more than one property and move from one home to another. When they lived in the previous home, their offset was on linked to that home loan which made sense. But after moving home that property turned into an investment, so borrowers would usually move their offset account with them to now link to the home loan where they live.

Moving house is a busy time, and that is often when mistakes happen.

Again, there could be reasons to do otherwise – there wasn’t any in the cases I saw. For clarity and understanding your options – see a licensed mortgage broker. It could also be worth seeing a tax professional when property is changing between investment and owner-occupied usage.

Avoiding offset account mistakes can save you

Banks get a lot of negative headlines for making offset mistakes – there have been plenty happen through bank and systems negligence.

“There was often an assumption that lenders will link your offset account appropriately”

But many mistakes also happen due to a lack of understanding and vigilance. When I have quizzed borrowers on how mistakes came about, there was often an assumption that lenders will link your offset account appropriately.

I have highlighted the common offset account mistakes I have seen borrowers make. Left unchecked, offset errors can add up – really add up.

There are a few ways to stay on top of your offset account and avoid mistakes:

• Check your online banking. Most lenders will have a good enough online banking platform that indicates what offset account(s) and linked and to which home loan.
• Call the lender. When in doubt. Ask.
• Keep your broker close – or if you want to speak with one let me know and I can put you in touch with a licensed mortgage broker.

Final word

Offset accounts are an excellent tool for paying off your home loan faster, but only if used correctly.

Be aware of these common areas offset account mistakes are made:

• Linking it to a home loan
• Offsetting the correct balance
• Care around spending
• Know how to use the offset account if you have one
• Offset the correct loan

Make sure you’re getting the most out of your offset account if you have one. Alternatively, you can always meet with a licensed broker to explore if an offset account is a good home loan strategy for your circumstances.