Hi Nicole,
I have been avidly reading your articles and advice. Thank you for sharing such practical advice with relatable examples and an excellent app!
You recently answered a question regarding the safety of a home loan with an online lender (the debt would be on-sold to another provider and the loan would continue). My question relates to the security of money in an associated offset account. How secure would the money in the offset account be? If the lender goes bust would they be able to take all of our savings in the offset account and then on-sell the full value of the loan? I'm worried that we could lose the funds in the offset account.
Many thanks,
Sarah
Good question Sarah. And other readers probably agree, as analysis of APRA data by finder.com.au shows nearly half of home loans now have an offset facility – a parallel savings account that "offsets" money against a loan so you save a chunk of interest.
![Make sure your offset account isn't really a redraw facility in disguise. Illustration: Michael Mucci](/web/20170427140640im_/http://www.theage.com.au/content/dam/images/g/k/f/q/l/n/image.related.articleLeadwide.620x349.gvogxg.png/1493220517594.jpg)
There was a time when a compelling reason not to go with a cheaper online lender was that, not being authorised deposit-taking institutions, they could not offer offset accounts. Some have since begun splitting out certain repayments in a quasi offset – on occasion, simply like a displayed redraw facility.
But there is a downside: offset accounts set up in this way are not subject to the Financial Claims Scheme or the scheme protecting deposits of up to $250,000 in the event the provider goes bust … only truly separate deposit accounts of locally incorporated authorised deposit-taking institutions (ADIs) are, whether they are offset or not.
Note APRA regulates ADIs (mainly banks, building societies and credit unions); online and other non-bank lenders are subject to the Consumer Credit Code and can be ruled on by the Credit and Investments Ombudsman. ASIC can also get involved if there's misleading and deceptive conduct.
So what if your online lender goes bust when you have an offset full to the brim? Gerard Brody, chief executive of Consumer Action, says: "Non-bank lenders that offer these products should be warning customers clearly that if they go under, the money in the account won't be protected by the government guarantee."
But rather than your offset funds being snaffled then your entire loan being on-sold to a different lender Sarah, they'd more likely just be sucked into your loan – indeed, that's where they may really live anyway.
The biggest issue could be losing access to money you wanted quarantined for school fees, a big trip or even to buy your next home (albeit with a loan reduced by that amount). I've previously explained that the last is a very shrewd move, but it won't be nearly as effective if your offset is a redraw in disguise. Ask.
Nicole Pedersen-McKinnon is a money educator and consumer advocate: themoneymentorway.com. You can write to her for help solving your money problem, or with a consumer question, at nicolehelps@fairfaxmedia.com.au.