Savings account vs mortgage offset: The best place to stash your cash

The positive side of the 12 rate rises we have seen since May last year is that people with any money to their name can earn interest at – in fact – an almost 12-year high.

Sounds appealing, right? But settling for that may even cost you. In fact, it may be a smarter money move to forego those appealing returns and put your money somewhere else instead.

What’s more, a quick financial restructure can even save you an average $505 per month, which gives you even more to save.

Also by Nicole Pedersen-McKinnon:

• Property vs shares: Here's the best place to put your money right now

• 5.5% savings rate: Where to find the highest interest in 11 years

• $456 a month: The loan that will slash your mortgage repayment

What happens when you put money in a savings account

The new highest rate of 5.5 per cent on savings (from ING) is appealing, but don’t forget that inflation at a monthly 5.2 per cent means you are pretty much treading water. By putting money in the bank right now, you go decidedly backwards when you take into account the tax you will lose from your earnings.

For money you want to keep safe, a better idea is usually always to house that cash against your mortgage, if you have one.

What happens when you put money against your mortgage

The 400 basis points of interest rate rises in quick succession have pushed the average discounted home loan variable rate to 7.06 per cent, on the latest Reserve Bank (RBA) figures. However, the cheapest-quality, comparable mortgage in the market still charges just 5.69 per cent (from Bendigo-Bank backed Tic:Toc), a difference of 137 basis points.

So, why is a mortgage more beneficial than a deposit account for any money you want to keep safe? Firstly, because mortgage rates are generally higher than savings rates – even the best-in-market loan is a smidge above the top savings account: 5.69 per cent versus 5.5 per cent (you have to jump through hoops to get that 5.5 per cent. First-home buyers can get 5.65 per cent from ME Bank but, for this article, we are comparing a loan you already have for a loan).

Secondly, and more importantly, you only effectively earn money when you put money against your home loan – you save it rather than actually earn it. And that means you don’t lose a cent in tax.

Why an offset account is smarter and safer

To make sure your money stays truly safe, don’t put it directly in your mortgage but alongside it in an attached offset account – it is mathematically the same but this keeps your cash quarantined from your lender trying to, well, keep it from you. It is within most loan T&Cs that lenders can freeze redraws if you get into financial strife. A couple of lenders have even recalculated loan balances and subsumed overpayments, claiming borrowers really owed them.

Keeping your savings in an offset allows you to retain access, come what may, like a traditional savings account but higher ‘paying’.

The financial restructure that can save you $505 per month

Finally, how can you get that extra $505 a month I mentioned earlier? The typical mortgage is now $593,475, which means refinancing from the average 7.06 per cent mortgage to the best 5.69 per cent mortgage represents a saving of $505 per month. If you can spare it, you can even refinance to the cheapest deal and invest what you save - now that the prospects for both shares and property may be brighter.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.

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