Def’n: A type of mortgage that involves blending a traditional mortgage with one or more deposit accounts; the savings balance(s) held in the latter can be used to offset the mortgage balance
Mortgage Offset: The Ultimate Double Agent
In the last few weeks I have had a number of clients come to me and say they were struggling to keep their budget on track. At first this didn’t seem too out of the ordinary, as most people struggle to keep on their budget from time to time, but as I looked a little closer I realized they all shared something in common.
The common link between each my clients was that they each had a mortgage offset account as part of their banking product suite.
To my mind, the mortgage offset account is the ultimate double agent working against your wealth, let me explain why.
Banks Hate Paying Interest & So Should You
Let me quickly clear something up: banks are not your friends, they are here for the sole purpose of making money for themselves.
I know you’re thinking, yeah but what about that advertising campaign with the helicopter, or that sporting event they sponsor, or that interest they so kindly pay me on my deposit account, surely they must be good.
Don’t be mistaken banks are here to make money and what’s more if banks were truly so friendly, they wouldn’t need to advertise.
‘’We are here to help you spend your money and when that runs out, spend ours (but make sure you pay interest).’’Banks make money from lending out money. A bank is nothing more than a salesperson, their product is money, and they are happy to lend to you on the understanding that you will pay them interest for the privilege.
Banks, particularly the big 4 banks in Australia, have a very good business model because they can source their product, money, very cheaply (both from Australia and overseas).
As money is cheap for banks to source, and everyone wants more money, that they can charge a healthy profit margin to you the borrower, in the form of interest.
Interest is the cost of money and will vary according to the money rate set by the Reserve Bank of Australia, as well as the movements of international money markets.
The larger the loan and the longer you take to pay it back the more commission for the mortgage broker.
Have you ever heard of a mortgage broker who wanted you to pay back your loan faster … of course not!
What is a Profitable Customer for a Bank?
A quick question:Q: If you were a bank who would be a better customer?
- A customer with $10 million sitting in a term deposit
- A customer with a $10 million loan
Banks don’t want more money, they want more loans, so the answer today is B.
The most profitable customer for the bank is the client with the biggest loans that are repaid over the longest amount of time (more interest paid, more profits for the bank).
Financial engineering is such these days that banks really don’t want you to pay back the loan, that’s just more paperwork for them, they just want you to pay them interest … forever if possible.
Don’t Want Another Loan? Have This Instead …
You would have heard the saying in business that it is harder to acquire an entirely new customer than it is to retain an existing customer.
Some businesses are built on getting the most out of their existing customers:
Banks have perfected all the tricks to get the most out of their existing customers.
Banks can use the direct method to get more business from existing customer:
‘’Hey Mr Customer do you want another loan?’’
… but what if there was an easier way?
Well luckily for banks there is an easier way to get more from their existing customer and that way is the mortgage offset account.
Offsetting Your Road to Wealth
One of the most profitable inventions for banks in recent times has to be the mortgage offset account. It is so seductively simple and appeals to the logic of the home owner, while falling victim to the subconscious.
For this reason, I believe the mortgage offset is the ultimate double agent, working against your wealth.
Don’t Believe Me, Then Try This:
A quick experiment, to demonstrate the wealth effect is action.
Which of the below options makes you feel wealthy enough to go on that holiday you have been dreaming about?
|Option A||Option B||Option C|
Did anyone else choose Option B, despite the fact the outstanding mortgage is by far the largest?
If you did choose option B, you would have fallen for the mystical power of the wealth effect.
The theory behind a mortgage offset account makes perfect sense: put all your income and savings into one account, the balance of which is deducted from your outstanding loan, thereby reducing the amount of interest you have to pay to the bank. There is only one problem with this equation, the less interest charged on your loan, the less profit for the bank.
Here is where the double agent comes into play. A mortgage offset account plays directly against your subconscious.
When it comes to money, think of your subconscious as the devil on your shoulder who wants you to live in the moment, spend everything now and forget about your future.
With a mortgage offset account, every time you log on to your internet banking you can see the large balance in your offset account, you feel rich, you spend more, you take longer to pay back your loan.
The Double Agent Secret
The mortgage offset account triggers your subconscious mind to think that you are richer than you really are. This mental triggering is known as ‘the wealth effect’.
Def’n: The wealth effect is the change in spending that accompanies a change in perceived wealth.
The wealth effect works perfectly on the offset account, because despite the fact that it is not really your money, it feels like it is (and the banks prefer it that way).
The offset account should be working for you, helping you to pay back the loan faster, but when combined with your subconscious the offset is actually working against you hence why it is the ultimate double agent.
Expose The Double Agent
So what techniques can you use to ensure you expose the double agent and turn them back into a standard secret agent (James Bond take note)?
1. Be Honest
The first step is to review the state of your finances and consider if in fact you fell for the seductive charms of the offset account. If you did, don’t worry, just promise yourself to take action by moving on to the next step.
2. Commit to the 20/30/50 Budget Method
The best way to budget is to allocate your income as follows:
- 20% to savings
- 30% to wants (clothes, holidays, eating out)
- 50% to needs (housing costs, utilities, food, transport)
Don’t cut corners, this method works for everyone and yes of course you can save 20%, just try it out.
3. Set the 20/30/50 Method to Autopilot
The best way to autopilot the 20/30/50 method is by having multiple bank accounts as follows:
- Have an external online savings account with no ATM access for the 20% savings.
- Setup a sub saving account linked to your current transaction (or offset) account and move 30% from each pay into this account. Set it up so you have to login and physically move the cash before you make a ‘want’ purchase.
- Use the offset account for the remaining 50%. This will encompass the mortgage payment which you were already making, plus any bills for things that you absolutely ‘need’ to survive day to day. Have each of your bills debited from your account automatically. You should have everything setup so you only ever touch your transaction / offset once per month, to move the 20% to your savings account and the 30% to your wants account. Simple!
4. If All Else Fails, Get Rid of the Offset
If you are still struggling, then chances are your double agent has become too powerful.
If this is the case, just do what James Bond would do…
You won’t be in a worse position if you get rid of the offset. Getting rid of the offset may actually provide the spark you need to get focused and commit to paying your mortgage off as soon as you can.
Regularly check this mortgage calculator and track your progress:
How much money could you save by paying back your mortgage faster?
The Wealth Guy
M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you.