Offset accounts and the Financial Claims Scheme

What does it mean when a financial institution specifies their offset account is covered under the Australian Government’s Financial Claims Scheme (FSC)? We explain how it all works (and why you’d want to ask your lender if your offset account is covered), as well as how the math behind offset account interest works.

The Financial Claims Scheme (FCS):

The FSC– colloquially known as the deposit guarantee – is an Australian government initiative guaranteeing the deposits of Authorised Deposit-taking Institution (ADI) account holders in the event of institutional failure.

Basically, if your bank goes bust, the government will compensate your loss up to a maximum of $250,000.

The scheme was introduced in October 2008 in response to the Global Financial Crisis (GFC) and has (thankfully) never been activated.

Key facts:

• In the event of an ADI failing, it guarantees the deposits of each account holder up to an amount of $250,000. This applies per account holder, per ADI.
• Joint accounts are covered for each account holder under the scheme. So, for a couple with a shared account worth $600,000, they are covered for a total of $500,000.
• While home loan offset accounts are covered under the FCS, redraw facilities (which aren’t separate deposit accounts) are not. This means if you’re making additional repayments on your home loan to use redraw like an offset, this cash is not protected under the FCS.
• In the event a bank operates other banking businesses under the same banking licence (such as Tic:Toc operating under Adelaide Bank’s licence, who is a division of Bendigo and Adelaide Bank Limited), the FCS will only cover up to $250,000 per account holder under the licence.
• APRA outlines this in a case study example:
  
  Susan has two accounts each worth $200,000. One account is with 'Bank ABC', which is licenced (authorised) by APRA, and the other account is with 'Bank XYZ' which is 'Bank ABC' but operating under a different trading name. As such, for 'Bank ABC' Susan has total deposits of $400,000 ($200,000 from each account at 'Bank ABC' and 'Bank XYZ'). However, Susan will only be covered up to the FCS limit of $250,000. In the unlikely event that Susan's bank fails and the FCS is then activated, Susan may be able to claim the remaining $150,000, or at least part of it, through the liquidation of her bank, depending on what assets are available.
  
• For Tic:Toc, this means the deposits held in offset accounts are covered up to $250,000 under the FCS. But, if you hold deposits in other banking businesses who operate under Adelaide Bank’s licence, regardless of the amount, you will only be covered for up to $250,000 under the scheme.
• Check out the full list of ADIs covered by the scheme on APRA’s site.

How offset interest is calculated:

As we’ve covered before, offset accounts can help reduce the amount of interest you pay on your home loan. They act just like a transaction or savings account. Usually, you can deposit to and withdraw from the account at any time, and typically they come with a debit card. An amount equal to the account balance is deducted from your principal amount when interest calculations take place. Interest on home loans is normally calculated daily (precisely at 5.00pm CST for Tic:Toc), and then charged weekly, fortnightly, or monthly. The basic formula for calculating daily interest with an offset account looks like this:

Show me how it works:

Hold on to your rhombus, things are about to get mathematical. Let’s step through an example.

For the purposes of this example, we’ll assume a $500,000 live-in variable loan with $30,000 in the offset account, and with a rate of 2.99% p.a. in a non-leap-year.

We start with the base equation, simplified:

Then, we substitute our numbers in, remembering to convert our interest rate to a fraction amount.

Simplify…

Simplify again…

Bam!

$38.50 for every day you have a $500,000 principal with $30,000 in the offset. Does it make a difference though?

Here’s the same calculation, with nothing in the offset:

That’s a difference of $2.45 in interest every day. Doesn’t seem like much, right?

Wrong. $2.45 every day for a year adds up to $894.25 (but we know you’ll probably be paying down your principal throughout the year, unless you have an interest only home loan). Over a 30-year loan term, a small difference adds up to a lot of money (and time!) and can have a huge impact on your bottom line.

How the Tic:Toc offset account works.

We like to do things differently at Tic:Toc - even our offset accounts. They’re structured slightly differently from most other lenders. Instead of deducting the offset balance from the principal amount and then calculating the interest, our offset account has its own interest rate. This rate is the same as your home loan rate when you sign up, and if you have a variable home loan, the two will almost always vary together (in fact, we’ve never varied one without varying the other).

We calculate interest daily but may charge weekly, fortnightly, or monthly depending on how you’d like your repayments. Therefore, the calculation for a Tic:Toc offset account looks a little like this:

And here’s an example using the same figures from before:

We again start with the base equation:

We’ll substitute our figures again:

Simplify:

Simplify again:

Badda-bing badda-boom:

$38.50 of daily interest – the exact same amount we received from calculating using the other method.

By structuring our offset account this way, it gives us the flexibility to change one rate, or both, if we need. Although to date, we’ve never moved variable rates for our existing customers without also moving the offset account rate.

Why are we telling you this? Well, we like to be honest and upfront about how our home loan features work. It’s highly unlikely we’ll change your offset account interest rate, but if we do, we’ll give you 30 days written notice.

Want to learn more about Tic:Toc's offset account? Read our offset account product guide.