Let’s look at how you can use your offset account to supercharge your future.
Offset accounts have always been promoted as a strategy to reduce the amount of interest you are paying on your home loan. Important? You bet, but that is just one advantage of an offset account. Did you know that there is a way to use your offset account to also afford an investment property, buy that bigger home for the future, save yourself thousands of dollars in interest AND wipe years off the life of your loan? We will look at the power that an offset account has to transform your financial life and bring your retirement dream closer.
What is an offset account?
An offset account is a savings account that is linked to your home loan. It allows you to ‘offset’ the balance of your home loan, against the money sitting in your offset account so that you only pay interest on the difference between them. Let’s say you have a $500,000 loan and $100,000 in your offset account, your lender will only charge you interest on $400,000, saving you significant money over the life of the loan.
How much can you save with a basic offset account?
Let’s compare the total interest you could pay over 30 years on a $500,000 loan compared to a $400,000 loan. You could save over $240,000 in interest and reduce the term of your loan by over 7 years (using a rate of 5%pa).
Let’s take this to the next level…. Let’s look at how smart advice can transform the life of a client.
Smart investment advice
Peter and Sally were recently married and wanting to enter the property market. They had found a three-bedroom home which they thought would suit them perfectly and give them enough room for the family they planned. They had managed to save a $100,000 deposit to put towards the $600,000 property. With them both working full-time, they agreed that the repayments would be manageable, even if Sally decided to cut back to part-time employment when they had children.
First home buying
We helped them, with their lender, setup a mortgage offset account to keep their savings in rather than pay down the loan. This strategy would reduce the amount of interest they would pay, while keeping their repayments exactly the same. Sally and Peter were sensible with their lifestyle and diligently made sure any surplus money sat in their offset account.
Time for an investment property
As the years continued Sally and Peter found that their perfect little home was not quite big enough for their growing family. With the addition of two growing children, they realised they needed to buy a bigger home. Ten years into their loan, the loan balance was now $400,000 and they had managed to accumulate $200,000 in their offset account. Like many other couples, they were keen to see how they could turn their home into an investment property while moving their family into a larger home worth $900,000.
Given that Sally and Peter’s first home would now be an investment property, the interest they were paying on that loan is now tax-deductible. This means they would be better off using the $200,000 in their offset account towards their new larger home, as the interest charged on this home would not be tax deductible. Sally and Peter purchased their new home for $900.000 with a new $700,000 non-deductible loan (using the $200,000 from their offset account as the deposit). Their investment property now has a $400,000 tax deductible loan, with a rental income of $450/week or $23,400 per year.
Managing rental income
With the total cost of their rental property coming to just over $23,000 pa (interest, rates, insurance, maintenance etc) Sally and Peter would not need to tip in any extra money to cover the investment. Effectively, securing themselves an investment property that paid for itself.
Not only that, but by using the larger deposit for their new home, the new loan would only need to be $700,000, instead of the $900,000 purchase price. Apart from the monthly repayments being $1,000 less, the smaller loan would save them $186,000 in interest over the life of their loan!
How to pay off your home faster
Sally is now back at work full-time however the couple had been financially prepared to fully cover the repayments on a $900,000 loan. Since they only needed a $700,000 loan, thanks to the bigger deposit, we advised them it would be sensible to match the higher repayment amount. By making an additional $1,000 a month (equivalent to a $900,000 loan), they would be able to save themselves a further $266,000 in interest and slash 11 years and off their home loan!
Based on the same monthly repayment amount, the total costs on a $900,000 loan is $1,740,000 compared to the total cost of a $700,000 loan being $1,086,000. Sally and Peter have a whopping $654,000 in their pocket!!
Just by using this one simple strategy of applying an offset account to Sally and Peter’s original mortgage, we have managed to:
- move their family into their dream home
- save them $654,000 in interest
- shred 11 years off the life of their home loan
and all while securing them a nice little investment property. Not bad, for one simple little account!
The financial benefit of a mortgage offset account will depend on a range factors, so it’s important to weigh up your individual circumstances and determine if an offset account is right for you. But one things for sure, being mortgage savvy and getting some tailored advice could make all the difference to your family’s future.
To be honest, some of this information can be a little complex, if you have any questions or comments, please get in touch – the team at Apollo is always here to help.