For parents with a mortgage, saving through a mortgage offset account may be a good way to save for the cost of education, but you need to be disciplined saver to achieve this goal.

Most banks and lenders have offset accounts that can be linked to the mortgage.  

Key features

  • Balances in the offset account is taken off the mortgage balance by the bank prior to calculating the interest charge. This means that the money in the offset account is effectively earning interest at the rate of the mortgage interest rate.  As this option is effectively reducing the interest that you pay, there are no tax implications by using this method. 
  • The offset account is linked to the mortgage, which means that you also do not have to worry about investment market volatility impacting your savings. However, it also means that you are also not benefiting from any growth in the investment markets.
  • Offset accounts can have charges associated with them and may also have restrictions on the number of times you can withdraw the money in the offset account.
  • Establishment and ongoing costs apply.
  • Minimum investment amounts may apply.

The drawback on this option is that any amount that you draw down on the offset account, whether it be for education or other purposes, is placing you further into debt.  The time when your children are just finishing school and university is just the time when you need to be thinking about putting more money aside for your retirement, not paying off a significant mortgage.

Some families treat an offset account like another savings account and continue to tap into the monies in the offset account for day to day expenses or other discretionary spending such as holidays, cars and large unexpected bills.  Mixing up your education savings with other costs may mean that the funds are not there when you most need it.  You will need to be disciplined not to tap into the funds in the offset account to ensure that you meet your savings goals.

You will also need to consider whether you want to be burdened with a large mortgage balance when your children finish school, or whether other alternatives are more suited to your needs.
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