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This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.


Offsetting mortgages will cost you more

Australian home buyers beware - mortgage offset accounts are not what they seem and may in fact cost more to run than the potential savings.

A report by financial services research group Cannex found that mortgage holders with a 100 per cent offset account attached to a $250,000 loan needed to have close to $13,000 in their bank account at all times in order for the product to save them money.

However, Cannex found that 63 per cent of the 6,000 offset accounts surveyed in September had a balance of $5,000 or less, while the average account balance stood at only $2,186.

Cannex financial analyst Harry Senlitonga said borrowers were falling into the trap of thinking that offset accounts would save them money without having done their research to understand how.

"People see offset accounts as a way to save money, but don't understand how to use these features to actually save money," he said.

Mortgage offset accounts allow borrowers to reduce the interest on their mortgage by offsetting it with interest earned on the balance of their linked savings account, which earns interest at the same rate as the loan.

However, borrowers are often misled about how much they will save over the life of their loan, with the banks often providing an example of the same loan with and without using the offset account.

The problem here is that the example does not take into account the average 0.6 percentage points more borrowers pay on their interest rate as part of taking up the offset account option.

For some borrowers who receive offset accounts through packaged loans, this interest rate amount may be lower, effectively reducing the amount of money they need in their account to break even.

Mr Senlitonga said because many people didn't understand how to use their account, only a low proportion of account holders had a sufficient balance for the product to save them money.

He said borrowers would get a better understanding of the pros and cons of an offset account if it were compared to a basic product with a lower interest rate.

Mr Senlitonga suggested that borrowers that were unable to keep the required amount of savings in their bank accounts throughout the life of the loan consider using a redraw facility instead.

Redraw facilities, which are commonly available on lower interest rate loans, allow you to pay extra towards your home loan, reducing the amount on which you pay interest.

However, borrowers are able to redraw the extra funds paid if the need arises.

"For most people it may suit their purpose," Mr Senlitonga said.

September 29, 2006 AAP


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