At some point, mortgage holders might face a challenging question – should they put as much money as possible in their offset account, or share the love and invest some of it in the stock market?
First, the bad news (it’s usually better this way): there is no crystal ball with the perfect answer. The good news is that both options have the potential to increase savings, and it’s great to have the option to choose what to do.
Keeping your cash in your home loan, or putting it into an investment option can be a difficult decision.Credit: Simon Letch
The key difference is that the returns from an offset account are guaranteed, whereas investing involves some risk.
Let’s break it down.
The benefits of an offset account
An offset account is a transactional account linked to your home loan. You can put money into it and withdraw whenever you want. “The money you hold in the offset account reduces the interest charged on your home loan,” says Quyen Truong, co-director at financial advisory Bruining Partners.
“For example, if you have $50,000 in an offset account and a loan of $200,000, you’d only be charged interest on $150,000.” Having money in an offset account is a productive way of storing a decent amount of cash, reducing your mortgage debt.
Making the right call will come down to your long-term investment goals.
Unlike a savings account, an offset account doesn’t earn interest and, as such, doesn’t incur tax. On an administrative side, some banks allow people to open multiple offset accounts connected to the same home loan, which can prove beneficial for budgeting.
However, Truong flags to check the fees of having an offset account. “How much interest will you save versus the actual fee for the offset account? For example, if you have $2000 in an offset account, the interest saving might be less than what you’re actually paying to have the account itself.”
Truong adds there’s no real disadvantage to keeping money in an offset account. “But the trade-off is you could be putting that money somewhere else, like your super or investments,” she says.
How does it stack up against investing?
For mortgage holders considering embarking on an investment journey or growing their portfolio, there are a few things worth considering.
The average Australian home loan is $626,000, according to the ABS, and the average amount of cash Australians have saved is $37,000. If you have that in an offset account, with a 6 per cent interest rate you’d save approximately $2220 of interest on your loan a year.
“If you were to instead take that money and invest it, to break even, your investment would need to earn your mortgage rate divided by 1 minus your tax rate,” Truong says.
“The average Australian income is $99,000. If you put that $37,000 into an investment that earns 6 per cent, the same as your mortgage rate, you’d earn $2220, but then you’d have to pay tax on it.”
This is taxed at your marginal tax rate. With this scenario, with a 30 per cent marginal tax rate you’d end up with $1554 after tax and be $666 worse off in the first year than if you left it in your offset account.
On the same figures, you would need to earn more than 8.57 per cent (after tax) to be better off than investing in your offset account. Note that this does not include the 2 per cent Medicare levy.
“This comes down to an investor’s risk appetite and the trade-off for return versus the risk that an investor would have to take to achieve that return,” Truong says. “With the power of compounding returns, an investor would still need to look at the breakeven return example and the investment time period to achieve that return.”
“The longer [money is] invested, the greater potential for return, versus investing in the short term. The potential benefits are amplified the longer you don’t touch your money.”
Unemployment rates and sticky interest rates might influence people’s decisions about whether to keep money in an offset account or invest, with Truong noting many are erring on the side of caution and keeping their money in an offset account, as the cash buffer gives people comfort.
At the end of the day, you have to ask yourself what your financial goals are. Are you aiming to own a home outright? Would you rather boost your super balance and enjoy the tax benefits? Do you want to diversify your wealth and income? Do you want more flexibility before retirement?
If you have a few goals, that’s fine too. But you’ll need to properly consider your risk appetite and financial position in your decision-making process.
Caterina Hrysomallis is a journalist specialising in health, lifestyle and personal finance.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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