The low interest-rate environment provides an opportunity for borrowers to refinance their home loan into a more competitive one. However, an expert has warned refinancers about the offset accounts being offered by online lenders.
After the Reserve Bank of Australia's back-to-back rate cuts in June and July, the majority of lenders have already passed the reductions, in full or partially, to their borrowers. The cheapest home-loan headline rates in the market are now "spectacularly low", beginning with a "2", financial adviser Nicole Pedersen-McKinnon said in a think piece in The Sydney Morning Herald.
The cheapest home loan in the market as of posting – a variable-rate mortgage offered by non-bank lender Reduce Home Loans – has a 2.89% rate. Pacific Mortgage Group also has a variable rate below 3%, offering it at 2.99%.
"The problem is that none of these lenders is an authorised deposit-taking institution (ADI). This means that, where they advertise an offset account, it's not an offset in the traditional sense of being quarantined from your loan ‘pot'. Instead, it's simply a separately designated part of it," Pedersen-McKinnon said.
She explained that an offset account with a non-bank is "simply a tally of any extra the borrower has repaid". While the $250,000 deposit limit applied to genuine offset accounts does not apply to the ones offered by non-banks, she warned that the lender has the call on what happens to the fund in times of financial trouble.
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"The lender may be able to freeze your access if you get into financial trouble. And the loan technically reduces by the amount you hold in an 'offset', which will forever count out tax deductions if you ever turn your home into an investment property," Pedersen-McKinnon said.
An offset account works like a high-savings account that is linked to your home loan. It operates as a regular transaction account and gives you ready access to a pool of funds. The beauty of an offset account lies in the fact that the amount of funds in it is accounted daily against your loan balance, reducing the mortgage interest charged to you. To know more about how it works, check out this guide.
Pedersen-McKinnon said borrowers who would like to refinance and have an offset account should consider transacting with an ADI. However, most of these ADIs charge higher mortgage rates.
"It's your call. If it sounds no good but you are aware an offset can be very good indeed in terms of slashing interest, turn your attention to ADIs. We're talking rates in the mid-3s, which, as I said before, is decent, if for that you get a proper offset," she said.