Offsets not a no brainer for all borrowers
NAB’s recent announcement that offset balances at the Big Four bank have increased by 65% since the pandemic served as a reminder of how popular these accounts have become among homeowners eager to cut mortgage costs.
According to NAB, some 70% of new homeowners are now choosing to offset their loans with the bank, up from just 50% in 2022.
Unlike redraw facilities, offset accounts aren’t linked directly to your home loan but serve a similar purpose – they reduce interest by effectively lowering your loan balance.
While lower loan balances mean lower broker commissions, the ever-increasing prevalence of offset accounts means brokers need to be armed with knowledge of the products on the market, and how they can benefit borrowers.
Not a no brainer
Around 75% of Mortgage Choice franchise owner Terri Unwin’s clients say they want to open an offset account alongside their home loan, but they don’t always have a clear understanding of their benefits and pitfalls.
“Most people are just asking for them because they've heard about them and may not necessarily be getting any benefit of having an offset account,” Unwin told MPA.
“It’s a matter of doing the numbers,” said Unwin. Perhaps the fees that come with having an offset account package nullify the interest rate benefit. Or maybe you’re better off parking your spare cash in a redraw facility.
To make matters worse, there are “huge differences” in the offset accounts offered by the lenders, said Unwin. Some offset accounts have to be in the same name as your home loan, some don’t. Some lenders, for whatever reason, offer up to 99 offset accounts. Others, like NAB, offer 10, while other lenders might just offer one.
“The majors are the ones that are going down the route quicker on multiple offsets, whereas smaller lenders are likely to be restricted,” said Unwin.
It also depends on the type of homeowner you are – investors will probably see a greater benefit from using offsets, but that’s not always the case, said Unwin.
It can get very complex very quickly, which is why brokers are so important for finding the best solution.
The commission conundrum
Net of offset requirements, which were introduced following ASIC’s review of mortgage broking remuneration and the Sedgwick Review, are seen by many as a reasonable, but it goes to show that broker commissions aren’t as unchecked as some financial sector voices suggest they are.
Under net of offset requirements, broker commissions are reduced by the amount held in a borrower’s offset account. For example, with a $700,000 mortgage linked to a $100,000 offset account, the broker will only earn a commission on the $600,000 balance.
Anja Pannek (pictured), chief executive of leading industry body the Mortgage and Finance Association of Australia (MFAA), has been banging this drum for a while.
Last September, Pannek pointed to net of offset requirements in response to claims from the banking sector that brokers had an unfair remuneration advantage.
This purportedly unfair advantage has been used by the banking industry to justify the move away from the 50% bonus cap; a move which triggered the 2023/24 House Economics Committee review into banker bonuses.
Broker commissions, reckon the banks, lack the regulatory overreach that banker bonuses do. Banks therefore need to offer their top talent better bonuses to remain competitive.
Pannek dismissed these comments as “convenient opinions couched as facts”.
She said: “Absent also from the commentary was the requirement for brokers to comply with the conflict priority rule. Nor was there any mention of commissions paid net of offset, or the banning of volume-based bonuses, soft dollar payments and other incentives.
“And, where was mention of the self-regulatory regime that includes clawbacks or the legislative prohibition on brokers to pass clawbacks onto clients? All of these measures act as checks and balances on broker commissions.”
Pannek reiterated these statements this week, following publication of the House Economics Committee review.
She said: “It is important to recognise the highly regulated environment that mortgage brokers operate in when the topic of remuneration is raised.
“The industry operates within responsible lending, the mortgage broker best interest duty and regulations in relation to conflicted remuneration including net of offset requirements. This ensures robust and strong consumer protections and industry accountability.”
Pannek also warned the banking industry against moving away from ‘self regulating’ the bonus cap.
“Stepping away from self-regulation as we have seen sets a worrying precedent,” said Pannek. “And justifying this change to have to compete against brokers is questionable at best. Banks compete against other banks, not brokers.”
Balances rising
Offset balances are also seeing a steady rise at challenger AMP Bank.
As a percentage of total residential mortgages, offset balances were estimated at around 13% at the end of AMP’s 2024 financial year. This was up from 12.5% in 2023, per the bank’s financial statements.
AMP’s head of lending and everyday banking distribution Paul Herbert said: “Offsets have increased in popularity across the industry in recent years, in part this due to rising interest rates and cost-of-living pressures.
“They can provide a range of benefits for borrowers, including reduced interest payments, greater financial flexibility through access to funds, reduced tax liabilities and higher interest savings.”
Herbert advises speaking with a broker, adviser or bank “to understand the options available to them before making any decision to change their loan arrangements”.
