Loan Tip: Not everyone needs an Offset Account
Offset accounts are great and most people should have at least one offset account, but there are situations where an offset account is not necessary.
Three situations I can think of are
- Someone with low cash savings, and unlikely to have cash savings
- Where the interest rates are higher on offset loans
- Where there are large annual fees
Loan product with an offset account is 3.8% and without an offset account is 3.4%
Interest on $100,000 at 3.8% = $3,800
interest on $100,000 at 3.4% = $3,400
The question is at what point does 3.8% rate equal $3,400 and working backwards this seems to be $89,474. so this means $10,526 in an offset or more could result in savings
interest on $100,000 at 3.8% with $10,526 in an offset = $3,400
Interest on $100,000 at 3.4% with no offset =$3,400
So this means unless the borrower has $10,526 in the offset, or more, they would be better off without an offset account.
Also offset loans often have a $395 annual fee. So that might mean about $20,000 is needed to be ahead.
Another situation where an offset may not be needed is where a person intends to smash the loan down and has no intention of investing. But in these cases I would probably suggest an offset account because circumstances change unpredictably.