Offset Account Savings versus Savings Interest Accounts

Mar 6, 2012
Chris Thomas

Money Should be put to Work Where it Will Generate the Most Benefit - C. Thomas

Having savings in the bank is often seen as a smart move with one's money. For mortgage owners, an offset account may offer so much more.

There are many financial planners and advisors who recommend that individuals have around $1,000 sitting in savings. This is their buffer or ‘just in case’ fund. Life can be extremely difficult when living from one pay day to the next, especially when:

The car breaks down suddenly
A doctor’s appointment needs to be paid for; or
You have to take a week off your casual paying job because of illness and no sick leave is provided

Having a savings account with some money put away for unexpected hard times is a wise habit to get into. However, for those who are paying off a mortgage, having this money sitting in an offset account can be so much wiser on the financial side of things.

Considering the Benefits of a Savings Account

Putting money into a savings account definitely has its benefits. The money can be put into a separate account that is ‘out of sight, out of mind’ – hopefully! An added bonus is the money can work for you, earning interest. At the moment in Australia this may be somewhere in the vicinity of 4 – 5% per annum.

Consider the example of $1,000 being stored away into a savings account at a rate of 5% per annum. This $1,000 will earn you $50 in interest. Of course, if the interest is paid monthly, compound interest will mean that a little more than $50 will be earnt from the $1,000 invested.

Because this interest is earnt, it does have one major drawback – tax. Depending on the tax bracket the individual is in, this could mean being taxed a minimum of 15% on any interest earnt.

Comparing the Offset Account

There is quite a difference in putting this same $1,000 into a mortgage offset account. For both the savings account and the offset, the $1,000 is accessible as the individual needs it – it can be transferred back into the main bank account to be utilised as needed.

In the offset account however, this money will work harder. Firstly, interest rates on home loans are always higher than the interest that can be earnt in a savings account. Compared with the 5% that could be earnt in interest, it is possible to save on interest of around 7% on a home loan.

This happens because the money sitting in the offset account is counted as being paid off against your loan, keeping your interest down. So effectively, that $1,000 is saving you 7% on the $1,000, or a total of $70 per annum. Again, because interest is calculated daily and removed on a monthly basis from home loans, the compound savings will be greater.

Another benefit of an offset account is because interest on one’s home loan is being saved - rather than earnt - the individual isn’t taxed on the amount they save from their mortgage. When looking at offset accounts in this light, it is easy to see how putting $1,000 into the offset account against the mortgage will generate more savings and have your money working harder than putting it into a savings account that will gain you interest.