With the “Offset” Home loan gaining momentum in popularity we thought it would be a good idea to review what it has to offer and how it differs from other loans.
A “table” home loan is the most common type of loan which sees clients making payments with a portion being interest and some principle. Interest is calculated on a daily basis but the balance will only be reduced in accordance to the frequency of the loan payments. Meanwhile any credits a client has in other accounts will earn interest. The interest the “credits” will earn will almost certainly be less than what is charged on the interest of the home loan. The interest that the Credits will earn are also taxable. Eg a normal table home loan will cost around 5.75%. The interest paid on Credits could be around 3%. After tax the net return is thus 2%.
The advantage of a “Table” home loan is that every lender has it and most people are familiar with it. You can fix this loan to secure against rising interest rates. There are no monthly fees. You can keep this separate from your day to day transactional accounts and your savings. The disadvantage is that the net returns are not great.
Revolving credit is a home loan, transactional and savings account all in one. Like a normal transactional account you can deposit and withdraw funds whenever you want. You can have Direct Debits, automatic payment and electronic transfers from this account. The basic principle to maximise the benefit of the revolving credit is to keep the balance as low as possible for as long as possible. You put your income in to the revolving credit account and then use a credit card which has 55 days (approx.) of no interest on purchases. So if you made a purchase you don’t have to pay for it for another 55 days keeping the balance down on your revolving credit longer.
The advantage of this type of home loan is that it is technically the quickest way to pay off your mortgage. The disadvantages are that it only suits approximately 15% of the population due to it’s complex nature and the reliance on the client being extremely financially disciplined for the entire duration of the loan term. A lot of people find it difficult to accurately identify exactly how much they’ve paid off their home loan, what their savings are and how much they have available to clear their credit card and pay other bills. This product usually attracts a monthly fee of between $9 - $12.
An Offset mortgage is a variable home loan. It is “linked’ to other accounts which when in credit will not earn interest. However interest is not charged on the variable Offset by the amount that clients have in their other linked accounts. Eg if you have an Offset home loan of $100,000 and $10,000 in a savings account and $5,000 in a transactional one then all up your accounts are in credit by $15,000. Interest would only be calculated on the remaining $85,000.
The advantage of this type of mortgage is that it allows the client to separate their finances so they can clearly identify what is savings, what is for bills and day to day living and how much is left owing on their home loan. The disadvantage is that this product is not offered by all lenders – in fact very few lenders. It usually attracts a monthly fee (around the same cost as the revolving credit account)
An Offset does offer the benefits of a revolving credit as well as keeping accounts separate thus ensuring more control. It is important to remember that the best type of loan is the loan that best suits your needs and your financial personality. This is often best done with a financial or mortgage advisor so that you are sure you are aware of all the types of loans and what they can offer and what the pitfalls are in each option.
