Financial planning is really about… multiple interest offset accounts

We have already looked at the benefits of mortgage offset accounts. Well, if one is good… two or more can be even better! 

Many lenders will allow clients to have one or more savings accounts that are matched to a home loan and offset the amount owed on that loan. The effect of this is that the amount of interest is reduced. Here is one way that a client can be helped to use more than offset account to reduce their interest expense even further. We call this ‘inter-generational financial planning.’ 

Where an adult child has a mortgage, and there is a scope for there to be more than one offset account, it can be a good idea for the adult child’s parents to use one of these savings accounts as their own bank account. This allows their adult children to enjoy the benefits of offsetting the interest on their home loan, while the parents (who have access rights to the account) still control their money.

The interest saved on the home loan will always be more than the parents will receive if the cash is held in a savings account in their own name. For example, the children might be paying (a non-deductible) 5% on their home loan while the parents only receive 1% on their savings. This means that the family is much better off if the parents’ money is used to offset the child’s mortgage account. 

Some families even ask the child to pay the parents the lower interest rate on the savings (that is, what the parents were going to get). This is still a win, as the child is avoiding a much higher interest rate, and the parents do not lose. 

Typically, the savings account offsetting the mortgage needs to be in the same name as the mortgage account. This means that money being used in this way is, prima facie, the legal possession of the mortgage loan holder (that is, the child). For this reason, this form of arrangement should be coupled with an agreement between the parents and their child (and the child’s partner if there is one) such that the legal right to the cash in the account is passed back to the parent. A simple way to do this is for the child to declare that the amount in the account is being held on trust for his or her parents.

This declaration should occur in some form of legal agreement, and you can contact MLA Lawyers for assistance in this regard.

The Dover Group