Property buyers hide record amount in clearing accounts
A borrower with a $1 million home loan with $100,000 in their clearing account could save more than $10,000 in interest over five years, according to RateCity, which monitors loan rates.
The calculations are based on a 25-year home loan with principal and interest, where the customer pays a 0.25 percentage point premium rate for the offset account, in addition to approximately $200 in annual fees. It also takes into account the increase in the cash rate to 1.75% by February 2024.
The higher rates
Tindall says the buffer provided by a clearing account reduces interest payments, “which is particularly beneficial when interest rates are on the rise.”
“A buffer is also your safety net when your life is throwing a curveball,” says Tindall. “You may fall ill and be unable to work, your roof may leak, or your child may be accepted into a school that costs an arm and a leg.”
Some banks charge higher interest rates on clearing accounts. For example, the ABC’s Basic Variable Rate Loan, with no clearing account, offers rates starting at 2.19% and no ongoing fees. The lowest bank-advertised rate for a clearing account is 3.85%, with an annual fee of $395, according to RateCity.
ANZ charges 2.19% for its basic home loan, but the lowest variable rate for an offset account is 2.99% and an annual fee of $120.
An ANZ borrower with a $1 million homeowner offset loan of 2.99% and $100,000 offset during the 25-year loan will pay almost $156,000 more interest over five years than a borrower at the bank’s variable base rate of 2.19. percent.
“Our research shows that in the case of ANZ, even offsetting $100,000 in a $1 million loan, you’re set back thousands of dollars,” Tindall says.
Other lenders, including Macquarie Bank, charge the same variable rate for home base and offset loans. But its compensation has an annual fee of $248.
The same borrower in a Macquarie offset account option instead of the Macquarie base variable rate would save more than $17,000 over five years.
“When it comes to choosing a home loan, the rate is key, especially for borrowers with larger loans,” says Tyndall.
Offset accounts deduct the value of any savings account tied to a mortgage before calculating monthly interest.
how they work
Interest can be reduced by paying regular payments or lump sums, such as bonuses, into a savings or checking account.
Some banks allow borrowers to open multiple clearing accounts, choosing to allocate one account for bills and incurred expenses, another for current expenses.
An offset provides more flexibility and control. The money from an offset is yours. Additional payments belong to your lender.
— Richard Whitten, Financial Writer, Funder
These accounts offset your loan balance using your home’s existing interest rate, which is usually much higher than the average savings account.
For example, the average standard variable loan owner-occupied, principal and interest of 3.22% compares to a paltry 15 basis points paid by savings accounts at some banks.
This means that the borrower with an offset account effectively earns gross interest on the offset mortgage because he does not earn interest that is taxable income. On the other hand, interest on savings in an account not linked to a mortgage is taxable.
According to Canstar, which monitors consumer markets, the need for a buffer is underscored by its survey which finds around one in three mortgage borrowers are struggling to make ends meet. About 14% are at their limit and 19% say that a weekly increase in the cost of living of $100 would put them in financial difficulty.
Richard Whitten, editor at Funder, which monitors the financial markets, says an offset account offers more flexibility than making additional mortgage payments because of continued access to money.
Whitten says, “An offset provides more flexibility and control. The money from an offset is yours. Additional payments belong to your lender.
Whitten says some savers maximize their compensation by depositing all of their pay and then spending through a debit card, similar to how they might use a transaction account.
Financial adviser Jamieson says record savings rates mean there could be better uses for savings, such as buying investment property or investing in stocks, increasing the possibility of higher returns but at increased risk.
“Those with strong cash flow, say $3,000 more per month after typical expenses, might consider an alternative strategy for some of their money,” he says.
Funds in a clearing account could be used as a deposit for investment property.
Borrowers may also consider a withdrawal account, which is an additional loan feature, rather than a separate account.
Withdrawal facilities generally only allow access to funds contributed beyond minimum repayments and can often come with other restrictions, making it necessary to check terms and conditions with the lender.
The borrower can access funds in the account, but over time the amount available to withdraw usually decreases in proportion to the outstanding balance.
This caused confusion among borrowers who thought that the total amount could be viewed at any time.
Tax experts warn that the Australian Taxation Office closely monitors withdrawal facilities for investment mortgages used for personal purposes, such as buying a car.