Refinancing to Loans with No Offset Can Lose Borrowers Money

Conor's Corner

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For many Australians, refinancing is an attractive way to lower mortgage interest rates and improve loan conditions. However, a move from a loan that includes an offset account to one without this feature might lead to unexpected long-term costs. Here’s what you need to know.

What Is an Offset Account?

An offset account is a bank account linked to your home loan. The money you deposit in this account is subtracted from your mortgage balance when calculating interest. For example, if you have a $400,000 loan and $50,000 in your offset account, you’ll only be charged interest on $350,000. This feature can significantly reduce the interest you pay over the life of your loan.

The Allure of Refinancing

Many Australians consider refinancing for reasons such as:

• Lower Interest Rates: Refinancing can reduce your monthly repayments.

• Better Loan Features: You might be offered more flexible terms or other benefits.

• Debt Consolidation: Some choose refinancing to merge multiple debts into one manageable payment.

  
  

Yet, if the new loan does not include an offset account, you might lose out on the benefits your current account provides.

Why a No-Offset Loan Might Cost You More

1. Lost Interest Savings

With an offset account, your savings work directly to lower your mortgage balance, which in turn reduces the interest charged. Without this benefit, you end up paying interest on the entire loan amount, which can add up to thousands of dollars over time.

2. Less Financial Flexibility

Offset accounts offer dual benefits: they help lower your interest while keeping your funds accessible for emergencies or other needs. Switching to a no-offset loan means you lose this valuable feature.

3. Impact on Long-Term Financial Goals

If you are disciplined about saving, an offset account can significantly boost your financial progress. Without it, you might miss out on potential savings that align with your long-term financial goals, such as paying off your home sooner.

Making the Right Decision

Compare the Numbers

Before you refinance, calculate how much interest you’re currently saving with your offset account versus the potential savings offered by the new loan rate. Use online calculators or speak with a financial advisor to understand the full impact.

Ask the Right Questions

When discussing refinancing options, ask your lender:

• Does this new loan come with an offset account?

• If not, what other benefits might make up for this loss?

• How can I replicate the savings effect if I move my funds elsewhere?

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Consider Your Financial Habits

Think about your savings habits. If you routinely maintain a high balance in your offset account, the loss of this feature could be more costly. Your personal financial behavior is a key factor in deciding whether refinancing to a no-offset loan makes sense.

Conclusion

While refinancing can be a smart move for lowering interest rates and improving loan terms, Australian borrowers should be cautious when switching to a loan without an offset account. The hidden cost of lost interest savings, reduced flexibility, and potential long-term financial impact means it’s important to weigh your options carefully. By comparing the benefits and asking the right questions, you can make an informed decision that truly works in your financial favour.

Taking the time to evaluate your personal circumstances and consult with a financial advisor may help ensure that refinancing saves you money—not cost you more in the long run.