Recently I was with a client who I did a loan for 19 years ago. He was single, on an average income, but he was now mortgage free. He didn’t have to live a life of extreme frugality. He took holidays and had nice cars. How did he do it; how did he pay his loan off in 19 years instead of 30? He used an offset account.
Offset Accounts have been around for a long time now but their ability to reduce your mortgage is still not well understood. Einstein said compound interest was "the eighth wonder of the world" so Offset Accounts must be the Ninth.
Having an offset account attached to your home loan is a virtual must for anyone who can save a little above their mortgage and other monthly costs.
An Offset account is a savings account that will save you money on your mortgage. It’s different from a normal savings account because;
The interest you pay on a mortgage will always be higher than the interest you earn on a savings account
You don’t pay tax on the interest you offset on your mortgage, saving you even more money
In simple terms, if you have a home loan of $360,000 and you have savings in your offset account of $20,000 then you only pay interest for the month on $340,000. On a home loan at 3.85 per cent, that’s a saving of $64.00 a month or $768.00 for the year. Increase your savings to $30,000 and you’re saving $1,140.00 a year.
The calculations to reduce interest are carried out on a daily basis, so each day you have a credit balance in your offset account, you're saving interest so every single spare cent you have should be sitting in your offset account. Have your salary and wages deposited there, rent from rental properties, share dividends, kid’s board money any spare change you have.
Let the funds sit in your offset account for as long as possible. The longer you can keep the balance high in your offset account, the lower you keep the interest bill and, therefore, more of your money is paying-down principal rather than interest. This is how you speed up the repayment of the loan.
Pay bills on the due date or use a credit card with interest free days to extend the time your money sits in your offset and use the funds to pay the credit card off in full each month and watch the savings start to reduce your mortgage.
You need to be aware that some loans with an offset account are marginally more expensive than a typical basic loan. However, by adopting strategies for aggressively paying down home loan debt, you can be better off in the long term.
Talk to EquityLend about your home loan and being mortgage free sooner 1300 55 22 30