Thousands of Australians waste millions of dollars collectively every day, by overspending on ill-suited mortgage products and paying higher interest rates than they need to.
More often than not, people end up paying too much simply because they don’t engage with their finances.
One of the most important strategies we teach our high-income clients is how to use an offset correctly.It’s a strategy that can save a mortgage holder $200,000 in the life of a loan without making any extra repayments – just by structuring your loan correctly with a good broker.
There’s no worse feeling than over-paying for something – it’s like pouring money down the drain.
A home loan is usually the biggest personal debt of your life and it should be treated that way, because the reality is, failing to proactively manage your mortgage could see you lose $100,000 to $250,000 over the life of your loan – perhaps more.It’s a huge wasted opportunity.
Get engaged with your finances
Your first step is simple. It’s essential that you regularly review your mortgage, to make sure your loans are structured in a way that can move you forward financially.
For high-income earners this is especially important, as you’ve got the resources available to take charge of your money and minimize your debts.
These resources include features such as offset accounts, which can play a key role in helping you pay off your mortgage, fast.
A qualified and experienced mortgage broker should keep you updated with the most recent products and product changes, so you’re always leveraging the most suitable financial tools for your situation. Check in with them at least every six months to see what opportunities are available.
Using an offset account to your advantage on your home loan
If you have a personal mortgage against your home loan and you don’t have an offset account, then you need a better mortgage broker.
Any borrower with any savings at all – even as little as $10,000 – should be leveraging an offset account to their financial benefit.
In essence, an offset account is a savings account attached to your mortgage account, which allows you to reduce your interest charges against your mortgage.
By using a credit card supplied as part of the package and enjoying up to 55 days of interest-free each month, you can save thousands of dollars – all by using other people’s money to help you reduce debt.
The money saved every year can then be redeployed into debt repayment, with extraordinary results.
It’s not just that it can allow an individual to pay off their mortgage/s or other debts sooner; it’s the fact that they will quite literally save six-figures worth of wasted interest and mortgage repayments by doing so.
Even if a person doesn’t pay a single extra dollar from his own personal income, other than the savings made from using an offset account, into his loan, the overall benefit is significant. In fact, some mortgage holders could save over $250,000 during the life of their loan.
Of course, there are alternatives to offset accounts. If you have $50,000 in a standard savings account instead of in an offset account, you could earn a small amount of interest from your bank.
But those earnings (which amount to around $1,000 on a $50,000 savings balance, at current rates of roughly 2%) would also be subject to tax, whereas any savings in offset do not attract tax implications.
If you’re a high-income earner paying the top tax bracket, then you can expect to funnel almost half of that savings interest towards the taxman, versus reducing your home loan more effectively.
The choice is yours: if you have $50,000 to leverage, you can save $2,900 per year with an offset account, or pocket around $500 from a savings account.
Redraw and offset: Which is better?
Another alternative to an offset account is to redraw, an option that many mortgage-holders use to maximize their money.
While an offset account is a savings account run in conjunction with your loan, a redraw facility is a feature within your mortgage. It enables you to deposit any spare income you have directly into your home loan account, reducing the amount of interest you pay on that debt.
You can ‘redraw’ any surplus funds from the loan when you desire, but in the interim you’ll save money on interest repayments.
You could pay $50,000 into your $500,000 mortgage and only pay interest on $450,000, while still having those funds available for redraw. Note that fees may apply for withdrawal, although a good broker may be able to help you get these fees waived, if this is the better option than using an offset strategy.
Generally, an offset account is the most suitable loan feature for high-income earners in allowing them to become mortgage-free, faster.
With an offset account, you can have your salary and any other sources of income paid directly into the offset account each month, ensuring that every dollar ‘not spent’ is being used to reduce the balance of your loan. While using an interest-free credit card, you’ll also maximise your interest savings, while knowing you can access your funds at any time.
A redraw facility is not suitable for this level of leverage, as it’s designed as more of an ‘interest savings’ strategy than a transactional account.
Furthermore, when using a redraw strategy, there are important tax considerations that need to be factored in. For instance, if you redraw money from an investment loan and use those funds for non-investment purposes, the interest on that amount will no longer be tax deductible.
Also, if you change your home loan to an investment loan, any redraw funds may not be tax deductible in the future due to the intention of those funds. This can create complexities when working out your tax deductions and may ultimately cost you more money in the long run.
We usually recommend using an offset account rather than a redraw facility.
This is one of many reasons why it’s important to engage a financial adviser who is also a expert mortgage broker . We also work with a number of trusted partners in this regard who can partner with you to maximise your financial situation. Contact us to find out whether an offset account or a redraw is best for you, based on your personal circumstances.
The dangers of a ‘set and forget’ strategy
Most people don’t pay much attention to their mortgage, unless they’re planning to change it. But the danger of this type of ‘set and forget’ mentality is that you could miss out on valuable opportunities to shave hundreds of thousands of dollars off your home loan.
To demonstrate this more clearly, we’ll run a few figures through our mortgage calculator to show you just how much being passive can cost you.
Let’s say there were another investor, who earns $150,000 per year and pays off $600,000 mortgage at a rate of $3,600 per month. In 30 years time, they pays off their loan completely – and they’ve paid a staggering $695,000 in interest along the way.
But what if they were a little more proactive?
What if they regularly reviewed their mortgage and consistently monitored the market. Let’s say they were on a standard variable home loan and met with broker, they could get a much better offer and potentially reduce their home loan rate by around 1% over the life of the loan.
This would reduce their average monthly repayment to $3,220 – and reduce their overall interest bill to around $560,000.
This one act of pro-activity saves them $135,000.
If they used an offset account to their advantage, leveraging $50,000 in savings against their mortgage. At a mortgage interest rate of 5%, this would generate interest savings of $50 per week, or $2,600 per year.
If they reinvested these savings into their mortgage?
They would then save a further $55,000 in interest repayments and wipe almost 3 years off the loan term.
With a little careful consideration – and importantly, no additional financial outlay – they have saved almost $200,000 in interest payments over the course of the loan.
An offset can help you pay off all your loans faster
Using your offset account, you can funnel your disposable income and interest savings towards debt repayment, prioritizing your non-deductible debts first.
A non-deductible debt is any debt that can’t be claimed at tax time. Your own personal home loan, personal credit cards and personal car loans are all examples of non-deductible debts that should be eliminated first and foremost.