I’m in the fortunate position of having more than $250,000 sitting in my offset account (rather than a redraw facility) with the Commonwealth Bank.
In the unlikely event of a banking crisis and liquidity crunch that saw bank depositors wiped out, would my cash balance in the offset account actually net off against my home loan in full or would I lose all the cash bar the RBA guaranteed amount of $250,000?
I know that in the bank accounting system they treat the offset account as a separate cash account and informally net it off against the home loan. But I have no idea what happens to that definition in the event of bank insolvency.
That’s a curly question, Melinda. First, as you say, it’s hugely unlikely that a large Australian institution would go under. Second, one never has so there is no precedent for what would happen.
For anyone who doesn’t know, an offset account is a savings account that runs parallel to a home loan, where the balance nets off your mortgage. In theory, it saves you an identical amount of interest as extra repayments would - but check as some coast on reputation not return!
A CBA spokeswoman confirms its Everyday Offset Account is “one of the many accounts that are covered” by the government’s Financial Claims Scheme that protects deposits of up to $250,000 if the institution implodes. She told me the offset and loan are treated separately but didn’t specifically address what happens to offset funds above the $250,000 threshold.
That’s key, indeed the point of an offset and why I like them so much: unlike with an all-in-one style line of credit or a loan that simply offers a redraw facility, your money is quarantined from a bank freezing it due to your personal circumstances taking a turn for the worse, like illness or job loss. (They also offer the full flexibility to withdraw funds down the track, say, if you wanted to use them to purchase a new property.)
The same is not true with any offset account with a non-bank lender. Such lenders are not authorised to take deposits so it was curious when several years back they began offering “offset accounts”. These are what I call fake offsets: your money is held in the loan itself, and just displayed to you separately.
So, were a non-bank lender to go bust, dosh could certainly be subsumed by a now-lower-balance loan. ASIC has raised the alarm about this precise thing.
Note, non-bank lenders are just about always more price competitive … for me the lack of a genuine offset is the price you pay. (For other readers: weigh it.)
Which brings me back to your question, Melinda. Your money – well, $250,000 of it – is in the safest possible place.
I suspect, beyond that amount, it would come down to the wording of a lender’s offset ‘independence’, and what the insolvency practitioner believes it can legally do.
If you want to protect yourself completely from bank-mageddon you could keep $250,000 in your offset account for a Holy S---! Fund and the rest in the loan itself. You risk losing access to the extra repayments in your loan, but it’s better than losing them completely.
Just be aware there’s a trade-off. If you ever want to redraw money to buy another home and keep your existing property as an investment, you’ll forego some tax advantages. That’s because while an investment loan is tax deductible, the redraw is considered to be for a non-deductible purpose. Keeping the savings separate in an offset account keeps things tidy for the Tax Office.
Nicole Pedersen-McKinnon is a money educator and consumer advocate: themoneymentorway.com. You can write to her for help solving your money problems, or with a consumer question, at firstname.lastname@example.org.