The home loan war is taking a new direction, as one of Australia’s biggest lenders, Bendigo Bank, offers fixed rate mortgage borrowers the option to access a 100 per cent offset account.
Bendigo Bank will open the offset account option on its Complete Home Loan packages to owner-occupiers and investors.
- An offset account is a bank account that is attached to a home loan. Funds in an offset account can “offset” the loan balance on a mortgage when the lender charges a borrower interest.
However, the offset account will come with a price. The interest rates on Bendigo’s home loans with offset accounts are five basis points higher than its lowest fixed rates and come with a monthly fee of $15.
Offset accounts are generally more common with variable rate home loans than fixed rate home loans. As few as nine lenders on the RateCity database have fixed rate mortgages that come with an offset account.
ANZ is the only big four bank that has an offset account with its fixed rate mortgage, but it is only available with the one-year fixed-rate option.
Other smaller lenders with this offering include Mortgage House, Teachers Mutual and Well Home Loans.
How much you could save with an offset account
Using an offset account may save borrowers tens of thousands of dollars in the long run. RateCity analysis shows by holding $50,000 in a linked offset account, a mortgage holder with a $500,000 balance on a 3.42 per cent rate over 30 years may save more than $78,000 in interest costs. The potential savings average out to be thousands of dollars a year.
They may also pay off their mortgage sooner, potentially shortening their loan term by nearly five years.
|Interest savings over loan term||
|Time saved paying off the mortgage||
4 years and 9 months
Notes: Based on a $500,000 principal-and-interest mortgage on the average rate of 3.42 per cent over 30 years. Calculations assume that the offset account balance doesn’t change month to month, and that the interest rate remains the same during the life of the loan.
Why you might want an offset account
RateCity.com.au research director Sally Tindall said the new offset option could appeal to mortgage holders who may have been hesitant to fix their interest rate due to a lack of flexibility.
“The lack of an offset account can sometimes be a deal breaker for people thinking about fixing their rate,” she said.
“Offset accounts on fixed-rate mortgages offer flexibility to households who want the benefit of record-low fixed rates, and the ability to reduce their interest bill with any spare money.”
Bendigo Bank consumer banking executive Richard Fennell said the bank’s Complete Home Loans also come with online redraw facilities, flexible repayments, and full offset on up to six accounts – features that don’t always come with fixed rate mortgages.
“Traditionally, while fixed loans provide the certainty of repayments for the life of the loan, no matter the interest rate environment, they have limitations in redraw and repayment options, and don’t assist you in reducing interest through offset functionality,” he said.
The home loan rate war rages
The move by Bendigo is an indicator that the home loan war is branching out beyond interest rates to mortgage features offering flexibility.
“This move will help Bendigo Bank stand out in what is a very competitive home loan market,” Ms Tindall said.
“An offset account on a low fixed rate may be especially appealing to investors who want to avoid using their redraw for tax purposes.”
Fixed rate home loans: What the major banks offer
|Bank||100% offset||Extra repayment cap|
|CBA||No||$10,000 a year|
|Westpac||No||$30,000 in the fixed rate period|
|NAB||No||$20,000 in the fixed rate period|
|ANZ||Yes (1-year only)||5% of balance or $5,000 a year|
|ING||No||$10,000 a year|
|Macquarie Bank||No||$10,000 a year*|
|Bendigo Bank||Yes||20% of balance in fixed rate period|
Source: RateCity.com.au. Note: Some Macquarie customers have an extra repayment limit of 5% of the initial fixed amount a year.
Things to think about when fixing a home loan rate
- Do you need an offset account? Most fixed rates don’t come with an offset account.
- Are you likely to make extra repayments? Most fixed rates have a limit on how much extra you can pay down on your loan within the fixed rate term.
- Are you likely to sell or refinance within the fixed rate term? If so, you could be charged break fees.
- Are you happy with the revert rate? A lot of banks will revert customers to a higher variable rate after the fixed rate period ends. Work out a plan for when your fixed rate ends.