For many Australians, purchasing a home is the most important investment you’ll make in your lifetime. Not only is your property a significant financial asset, it is also an investment in your lifestyle and the feeling of security that comes from owning your own home. If you have some spare cash available, paying off your home loan might seem like a no-brainer, but would an offset account be better aligned with your long-term financial goals?
Benefits of using an offset account
An offset account is a separate transaction account which is linked to your home loan. By using an offset account, you can save thousands on your home loan while maintaining easy access to your funds.
What are some benefits of using an offset account?
Pay less interest
The funds held in an offset account are ‘offset’ against the balance of your home loan, reducing the interest charged on the principle balance of your home loan. Over time, this can save you thousands on your mortgage.
As an example, if you have a home loan balance of $600,000 and you have $90,000 in your regular savings account, you will be charged interest on your entire home loan balance of $600,000.
Alternatively, if you have a home loan balance of $600,000 and you have $90,000 in your offset account, you will be charged interest on a home loan balance of $510,000 (your home loan balance minus your offset account balance).
In this scenario, an offset account balance of $90,000 could save you more than $273,000 in interest and shave more than six years off the life of your mortgage*.
*Based on a 5.5% interest rate over 30 years.
Use the Homestar Finance Offset Calculator to find out how much you could save with an offset account.
Maintain access to your savings
While making extra repayments on your home loan can be satisfying, having cash readily available for life’s little surprises can provide valuable peace of mind. One key benefit of using an offset account is that you will not lose access to the funds in your offset account. If you need a little extra cash for bills, investments or even a holiday, you can access your offset account funds immediately.
Enjoy tax benefits
Many homeowners are not aware that interest saved by using an offset account is not considered taxable income, unlike interest earned in a traditional savings account.
For example:
- If you earn $500 interest in a regular savings account, this is considered taxable income and you will need to pay tax on this amount.
- If you save $500 in interest by using an offset account, this saving is not subject to tax.
Over time, the interest saved using your offset account may provide more long-term financial benefits than the interest earned by keeping a lump sum in a high interest savings account.
Benefits of extra mortgage repayments
Home loan repayments typically represent the largest household expense for Australian families. Reducing (or eliminating) your mortgage payment is a great way to free up more money in your budget.
How can you benefit from using your spare cash to make extra repayments on your home loan?
Supercharge your equity
Paying off your mortgage early can be a smart financial strategy for homeowners who would like to build equity, fast. The equity in your home can be used to build wealth without dipping into your personal savings.
Using equity to purchase an investment property, start a business or consolidate your debts can help you achieve financial freedom. Even if you don’t have your eye on a particular investment right now, making extra repayments on your home loan ensures that when the right investment comes along, you’ll be well positioned to act quickly.
Enjoy financial security
Paying off your mortgage is a dream for many homeowners. Making extra repayments toward the principal balance of your loan account can help you achieve that goal faster.
If the idea of putting all the money in your savings account toward extra mortgage repayments doesn’t feel ideal, ask your home loan provider about using a redraw facility. A redraw facility allows you to access to the extra repayments you’ve made on your loan amount, which can provide peace of mind in an emergency.
Save on interest charges
Saving on interest costs is a major benefit of making extra repayments on your home loan. You pay interest based on a daily calculation of your mortgage balance. When your mortgage is reduced, your interest expense will also be reduced. Simply put, the higher your loan balance, the more interest you pay.
How to choose what’s right for your situation?
When choosing between using an offset account or paying off your mortgage, it’s important to consider what’s best for your personal financial situation. Before making a decision, there are some questions you should ask yourself.
Principal place of residence vs investment loan?
Is your mortgage for a home you live in or an investment property? The answer can be an important factor in deciding whether to use an offset account or pay off your mortgage balance.
If you have two different loans:
- Which loan has higher interest rates?
- Which loan has a higher balance?
- Will one property benefit more from additional repayments?
- Does one property have more equity than the other?
- Are you planning to sell one of the properties soon?
There is no one-size-fits-all answer, but these questions can serve as a jumping off point to decide which strategy is best suited to help you achieve your financial goals.
Do you have another form of cash savings?
Life happens. Medical bills, car breakdowns or urgent home repairs can put significant strain on household budgets. Having an easily accessible emergency fund is an excellent way to ensure that you can ride out any unexpected storms.
If you have a healthy emergency fund in a savings account, you may feel more comfortable using your extra cash to make lump sum payments on your mortgage balance. If you’d prefer to put as much money as possible toward reducing the interest charged on your home loan, keeping money in an offset account and being able to withdraw those funds easily in an emergency may be a more attractive option.
Do you have multiple offset accounts set-up?
Just as you can have multiple savings accounts for different financial goals, you can set up multiple offset accounts which all offset the balance of your mortgage.
While multiple offset accounts (link to new multiple offset article) are a great way to keep track of your finances, many lenders do not offer this option (or charge excessive management fees). If multiple offset accounts are important to you, it’s a good idea to shop around. Some lenders such as Homestar Finance offer multiple offset accounts with no account fees.
Should you offset more than you’ve borrowed?
No. The purpose of an offset account is to reduce the interest you pay on your home loan. If your offset balance is higher than your current home loan, there is no benefit to the amount in your offset account above your existing home loan balance.
Summary
Using an offset account and paying off your mortgage can be an excellent strategy to help you reach your financial goals. Before applying for any financial product, it’s important to make sure it’s the right option for you.
Speak to the friendly Loan specialists at Homestar Finance about your personal goals and financial options today.
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