How an offset can help you beat the RBA and engineer your own interest rate saving
Want to use every dollar you have to your name twice? How would you like early debt-freedom from doing nothing more than a bit of smart financial restructuring? What about saving tens of thousands of dollars – even hundreds of thousands – in the same way?
Or maybe you’d simply like a way to beat the RBA… and slash your interest regardless of the fact it doesn’t look like there will be any official slashing for the foreseeable future. Let me introduce you – properly – to the mortgage offset account.
What is a mortgage offset account… really?
A mortgage offset account does just that: it offsets money held in it against your home loan balance.
What that means is if you had a $100,000 mortgage and $10,000 sitting beside it in an offset account, you would only pay interest on $90,000. What kind of difference would that make to your interest bill? Let’s use a modest Australian mortgage of $400,000 and an interest rate of 5 per cent, very close to the most competitive mortgage on the market right now.
Let’s also establish immediately that every (non-invested) dollar you have to your name should live in offset accounts… house them instead in a ‘high’ interest savings account and you will typically earn one percentage point less in interest than you would save in mortgage interest from an offset.
Don’t forget, either, that you will lose tax from earnings in a savings account. So, you might – effectively – get only half as much benefit if you opt for the deposit account instead of the offset opportunity.
But where could all this money to keep in an offset ‘magically’ come from?
What savings should you hold in offset?
This could be school fees, holiday savings, a stash for some renovations – and most definitely your emergency fund… or what I call your Holy Sh*t fund.
The last one is a vital aspect of smart and safe money management… in case ‘sh*t’ goes wrong. You should aim for six months’ salary in reserve – in an offset – for this.
But don’t worry if you have nowhere near that amount – just start squirreling away what you can, when you can. The beauty of the offset offerings by most lenders now is that you can have 10 or even more separately named such accounts.
So, your money never gets mixed up and your budget never confused.
How much could you save… from savings?
Okay so now let’s assume that you have that $400,000 mortgage and also $30,000 you have scrounged from (and for) all of the above places.
Hold that amount in an offset account alongside a 25-year home loan and you will save almost $66,000 and shave 2.5 years off your loan.
Don’t forget that’s from doing nothing but a bit of savvy savings reorganisation.
And don’t miss that when your mortgage is repaid all those months earlier, and you have saved that money in interest, you will still have your $30,000 savings.
But, for the really clever home-loan holder, there is a way to work an offset account for enormous interest advantage.
Next-level your offset account strategy
The real power of the offset account comes when you – safely and for free – fill it with money that isn’t yours.
This is not as outlandish as it sounds… it simply requires a credit card.
But let me say upfront that, as such, this strategy also requires discipline. If you are liable to spend more than you otherwise would because of said credit card, don’t get one.
You will actually be liable and, chances are, swiftly become unable to clear your card in full each month.
Of course, clearing your card in full each month is the way to ensure you don’t pay any interest and that the money is, in fact, free.
Some cards come with as many as 55-days interest free.
What I call the offset-on-steroids strategy then simply involves using your credit card to pay every expense that you can so that you can sit your salary/ies in an offset account for that whole month.
Only when the bill is due – just in time to avoid racking up even one cent in credit card interest – do you transfer the money from your offset account for your card bill.
Compare Club verdict
An offset account is a powerful, Aussie-invented tool to save mortgage interest at no extra cost.
Using one is just economically clever. Particularly if you use it to its full potential.
What extra could you save if you had our example $400,000 mortgage with offsets full of not just the $30,000 in savings from above, but also another $10,000 in monthly household salaries?
You would boost your ‘free’ interest saving from circa $66,000 to nearly $85,000… and mortgage-freedom three years early.
If you have a mortgage but not an offset, it’s time.
