Offset Accounts Versus Savings

Most of us have a home loan and some even have some savings sitting in a bank account. Now whilst I’m all for saving and it’s great to have some cash funds tucked away for emergency’s it is still important to get the maximum return on these funds. Bank interest these days is a joke, the majority of funds earn less than 1% and they lend this money out at over 9%, no wonder they make billions. The first thing you need to decide is do you need the interest from these savings? (Lets assume you have $20000) If you need the interest to assist with cash flow then you need to ensure you get the best rate and you should have no trouble getting between 7.5% and 8% at the moment. An 8% return will give you $1600 per annum in interest. Problem now is tax. Presume hubby earns $90000 and wife $0. If funds are in the wife’s name then $0 tax, joint names will mean $332 and if in hubby’s $664. No brainer really, if you are both in the same income tax bracket then joint names is fine, else invest in whoever sits in the lower income bracket.

Some loans have offset or redraw facilities. An offset allows funds to be placed in an account linked to your loan. If you have a loan of $100000 at 9% and $20000 sitting in an offset account then you only pay interest on the loan for the first $80000. This reduces interest payable on the loan and hence the loan term. The actual return is $20000 at 9%, or $1800 with no tax payable so this is by far the best option. A redraw has the same affect as the funds go direct into the loan but you can still get these funds back out if required. With an offset you can access funds at any time like the savings so it is a great option. Not all loans have this facility but most do and you can take further advantage of this by having all incomes paid to the offset account but that’s another story.