Refinancing to loans with no offset can lose borrowers money

Big banks are dangling discounted rates to refinancers, but what they don’t tell you could cost you thousands in repayments.

Westpac made waves with a rate cut, but there was more to it.. Picture: Simon Bullard.

ANALYSIS

Westpac got everyone talking last week when it slashed its variable home loan rate to 5.84 per cent for refinancers, to match ANZ for the best rate in market of the big four banks.

The move was billed as “starting a refinance war” and “throwing down the gauntlet” to the competition.

The only problem? If you switch to this Westpac loan, you’re actually likely to start losing money in the short term.

Not only would you need to apply online, directly to the bank and have a deposit of at least 30 per cent; but there was a much more significant ‘devil in the detail’: the loan would not come with an offset account.

And an offset account is the single greatest way to reduce the dead money that you pay to the bank in interest, while still having access to it in case you need it for unexpected costs, bills, or emergencies.

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Say you had a $1 million mortgage and had $50,000 in savings in the bank. An offset account would mean you were being charged interest on $950,000.

Westpac does offer loans with offset account options, but their rate on those is 7.19 per cent. You have to pay extra for the privilege of saving money on interest.

CBA and ANZ are the only two of the big four that allow offsets on their best rates.

CBA offers 5.90 per cent, but you need a 40 per cent deposit. ANZ will give you a 5.84 per cent rate with a standard 20 per cent deposit.

But do offsets really matter to Aussies? Yes, according to APRA’s most recent Quarterly Property Exposure Statistics, which show $13 billion was added to offset accounts over the three months to December last year. All up, Australians now have $300.7 billion stashed in offsets. That’s a record sum.

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Offset accounts can save borrowers a lot of money in interest. Picture: Simon Bullard.

Nearly $73 billion of this has been scrounged away in the last three years, after the RBA started hiking the cash rate.

How else would we have managed to avoid toppling over the much warned about mortgage cliff?

There are always better deals out there than what the big four banks are offering.

A Canstar analysis revealed that while the average best variable rate from lenders for loans with an offset account is 6.07 per cent, compared to 5.88 per cent for loans without the feature, there are 30 lenders in the market with variable rates below 5.75 per cent.

And, 12 of these have offset accounts.

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Compare a million dollar loan with the People’s Choice bank, featuring an offset and a 5.64% interest rate, to one from Westpac with an offset and 7.19 per cent interest … the repayment difference is nearly $1000 a month.

Lowest rates with an offset

People’s Choice: 5.64%

Bank of China: 5.68%

G & C Mutual Bank: 5.70%

Unity Bank: 5.70%

Homestar Finance: 5.74%

The Capricornian: 5.74%

Tiimely Home Loans: 5.74%

Police Credit Union: 5.74%

Australian Mutual Bank: 5.74%

Northern Inland CU: 5.74%

Queensland Country Bank: 5.74%

Summerland Bank: 5.74%

Source: Canstar (Note: Excludes green loans and introductory rate loans. G & C and Unity rates are for essential workers. Offset accounts can attract higher fees than basic variable rate accounts).

Originally published as Refinancing to loans with no offset can lose borrowers money