A mortgage broker with over 30 years’ experience in financial services has challenged the widely held belief that you should always have an offset account for your clients.
Recent regulatory changes have effectively created a “tiered market”, according to Choice Home Loans broker John Tindall, who believes recent price changes have had a significant impact on mortgage offset accounts that has not yet been fully realised.
“For many years the traditional thinking was that almost all clients should have an offset account,” Mr Tindall told The Adviser.
“The regulatory changes have now introduced a tiered market,” he said. “So if I look at my own aggregator’s white-label product, ChoiceLend, an interest-only combination (fixed and variable) three-year investment loan with under 80 per cent LVR equates to about 4.5 per cent."
The equivalent products with other major lenders are about 20 to 25 basis points more expensive, Mr Tindall said.
“If the average loan size is more than $500,000, then the other major bank equivalents are $1,000 more expensive a year.
“In other words, the before-tax cost of a loan with an offset facility could exceed $1,000 a year,” he said.
Mr Tindall argues that in the first few years of a loan’s life, the borrower has probably maximised their borrowing. As a result, they don’t have a lot of surplus capital to put into an offset account.
“For investment lending, it would make better sense to go for the cheapest loan available on the first few years and then switch to an offset when clients have potentially more surplus income and can dedicate the surplus capital onto the offset account,” he said.
Offset account balances currently amount to around $90 billion, or six per cent of housing loans outstanding, according to the Reserve Bank of Australia.
In its August Statement on Monetary Policy, the RBA noted that offset account balances have been growing by approximately 30 per cent annually over recent years.
“This growth has the potential to continue as older loans that are less likely to have offset accounts are replaced with new loans, where it is more common to have an offset account,” the RBA said.
However, Mr Tindall’s analysis shows that new borrowers might be better off choosing the cheapest loan without an offset facility in the early years, then switching to a product with an offset account when their surplus income has increased.
“This argument seems stronger the less spare income/capital the client has,” he said.
“I think the common wisdom around offset accounts has changed and [that] has not been fully realised.”