If You Have Already Reached Your Goals, You Set Them Too Low In The First Place!
Offset Accounts are Useless

Offset Accounts Overpromise and Underdeliver

I have provided a couple of calculators in this blog to highlight the relevants and irrelevants (yes,those are nouns) of a mortgage.
There are three components to any mortgage:
  • Principle outstanding
  • Duration of Principle Outstanding and
  • Interest Rate
Previously I have been able to exhibit that the interest rate has the least effect.
So it would be logical to work with the balance of the mortgage outstanding and the duration that balance is outstanding.
You can play with the calculators and derive your own results easily.
But now another distraction is thrown up:

The Mortgage Offset Account

Here's how it works: The offset account is a transaction account attached to a home loan. The balance of the account is offset 100% offset is taken away from the principal remaining on the loan for interest calculation. In my travels, a high percentage of people have told me that they are under the impression that the Offset Account is equivalent to any alternative system available and that it is effective in paying off the mortgage quicker. Well, "quicker" is a relative term. 

So let's do some numbers:

  • Husband and wife (no children) working full time earning the Australian average wage
  • Incomes Taxed as per Australian Tax Office guidelines (ignoring Medicare levy).
  • No savings / Spend all earned income
  • Monthly spend does not include rent / mortgage payments
Individual
Gross $ (pa)
Less Tax (pa)
Nett $ (pa)
Nett $ (pm)
Husband
$83,902
$18,815
$65,087
$5,422
Wife / Partner
$70,392
$14,424
$55,968
$4,662
Total
$154,294
$33,239
$121,055
$10,084
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Spending
(Rent Excluded)
(No savings)
..
$6,900
** The HELOC savings are conservatively understated for the sheer purpose of calculation comparison. We assume that the couple is saving nothing and is spending everything that they earn so we show a monthly spend figure of $6,900. This is derived by Nett Income less hypothetical traditional Mortgage Payment. A DINK (Double Income - No Kids) couple would probably not spend this amount consistently and would see the benefit in their savings, making extra payments on their traditional mortgage or seeing an even better outcome using HELOC. Your understanding is appreciated. **
 Our couple qualifies for the following traditional mortgage:
PURCHASE PRICE
..
$777,500
Less Deposit
20%
$155,500
Mortgage
..
$622,000
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Repayment
Monthly
$3,189.00
Term
Years
30
Interest %
Currently
4.6%
..
Comparison
4.99%
Required Input
Loan term
Loan amount
Interest rate
Repayment frequency
Offset amount
Start offset at year:
Original loan
Loan with offset amount
Results
Current repayments
$4,000
Original total amount
$4,000
Updated total amount
$4,000
Interest you will save
$4,000
Time you will save
$4,000
Updated loan term
$4,000


Required Input

First Person Monthly Nett?
Second Person Monthly Nett?
Other Income Monthly Nett?
Monthly Spend?
Mortgage Pay Out?
Interest rate?
Mortgage Balance
Results

Pay Out Date
$4,000
Loan Term (Years & Months)
$4,000
Total Interest
$4,000

Outcome:

  • With a traditional Mortgage, the interest calculated will be $525,913. (Total Cost $1,147,913 - 622,000)
  • Using HELOC, total interest saved paying out the mortgage 1 year and 5 months earlier will be $472,893.
  • Resulting in a saving of $53,020.

To achieve the required saving of $53,020 using an offset account the following charts shows the amount having to be deposited:

Years
Mortgage has been running for (years)
Deposit $$
30
0
$18,915
20
10
$38,580
10
20
$125,715

Closing Comments

There can be little doubt that an offset account has the effect on paying off a mortgage quicker.

In most cases you can have excess funds added to the offset account to get a better result but you can also grab monies back and pay the penalties.

So why not do exactly the same with Home Equity Line of Credit where "surplus" funds are put directly to your mortgage.  When funds are required for emergencies, holidays or other expenditure, why not put them on credit card with no effect and then, as apart of the regularly monthly clearing of the credit cards, the Home Equity Line of Credit is increased to cover these outgoings?

The effect is far more beneficial.

You are actually in a better position when "life happens" and you have a HELOC in place.

Watch for the upcoming blog where we do exactly that - take a great holiday and still keep making great gains on paying out the home mortgage.

As all my blogs, I am working with actual numbers and all assumptions are explained.
I take a very conservative position.So I encourage comments and discussions on all the information provided.
All financial products discussed are readily available and how you choose to use this education is your choice.
 

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