Tuesday, April 23, 2019

offset

Looking for ways to pay off your mortgage in record time? Whether you are a seasoned investor or buying your first home, an offset loan can help you reduce interest payments, save on tax and pay your mortgage off years ahead of schedule. 

What is an offset loan?

With an offset loan (also called an offset account, interest offset account, mortgage offset account or offset home loan) the borrower takes out a home loan and opens a linked savings or transaction account. The balance in savings account is then 'offset' daily against the home loan. 

How does an offset loan work?

With an offset loan, instead of receiving interest on your savings account each month, the account balance is offset against your home loan, reducing the amount of interest you pay over the life of the loan.

For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your loan is calculated on $380,000 instead of $400,000.

While your repayments remain the same, you are paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan. 

For home owners, another potential benefit is that the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, which means you may not have to pay tax on any interest earned on your savings. Seek advice from an accountant or financial planner on the tax implications of an offset account. 

Getting maximum benefit from an offset loan

Because your mortgage interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan, you can still access the money in your offset account online or with an ATM card, but because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible. 

Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you are not a disciplined spender you may end up incurring interest charges and cancelling out the savings benefit. 

What do you need to know about offset loans?

  • An offset account is identical to any other savings account with a bank card and online access, so you can withdraw your money at any time. 
  • In most cases, the offset is tax free (but do consult your tax accountant).
  • Most offset accounts are offered with variable rate loans, however some lenders offer offset accounts on fixed rate loans too. 

The upshot? Many borrowers could benefit from having an offset account, particularly if you plan on refinancing or moving home in the near future. It is worth talking to your broker to find out more about the best option for your circumstances. 

 

refinance

Everyone wants to pay less on their mortgage and refinancing is one strategy that can help lower your interest rates, but is it worth it? We take a look at how you can get the most out of refinancing. 

Why refinance?

Generally, people refinance to negotiate a better deal on their home loan and pay it off sooner. Depending on your situation, you should be able to save money by taking advantage of lower rates or new products that were not available when you first negotiated your home loan. 

To help put it into perspective, let's say you previously took out a $300,000 loan at 7.5% over 30 years with monthly repayments of $2,098. If you refinanced to a new loan at 4%, you could save $239,543 ($665 per month) over the life of the loan by making the minimum repayments of $1,432 per month. 

Once you have refinanced, if you continue making the same minimum repayments as your previous loan ($2,098 per month) you will potentially save $346,912 and pay off your mortgage 165 months early. 

Make it work for you

Take advantage of your refinance loan by:

  • Consolidating debts: Home loan interest rates are often lower than those for other forms of credit, so you can save money by consolidating debts such as credit cards or personal loans into your mortgage. Beware, however, paying off a short-term loan over a longer period will likely incur extra interest and fees over the longer term. Put the money saved from consolidating your debts into your mortgage as if you were still repaying the other debts to reduce the overall debt faster. 
  • 'Splitting' your loan: Nominate a portion to be charged at a fixed rate of interest for a set period of time, with the balance charged at a variable interest rate. When the fixed rate period ends, the loan reverts to the variable interest rate. You will benefit from the security of the fixed rate and flexibility of a variable rate loan, and are impacted less if interest rates rise. 
  • Having an offset account: The balance of your offset account is subtracted from the remaining principal amount before interest is applied, meaning you spend less on interest over the course of your loan. 
  • Making extra repayments: Any payments made on top of your regular repayment will save money by reducing the amount of interest you will pay. 

When should you consider refinancing? 

Life brings change and your mortgage needs to keep up - maybe you now have a partner, a young family, a new job that pays more or have become empty nesters with extra cash on your hands. If the terms of your current loan do not allow you to pay more (or less) on your principal amount, it could be worth considering refinancing into a more flexible arrangement. 

Refinancing or loan switching can save money but you might incur costs such as exit and establishment fees, government charges and administrative or legal expenses. These costs need to be weighed against the benefits to determine if you will save in the long run. 

Today's home loan market is very competitive and there might be a loan out there offering the features and flexibility you want. Before you make any decisions, be clear on your reasons for refinancing. It is also a good idea to speak to an experienced mortgage broker or financial expert to ensure you are making the right move for your financial situation. 

 

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Contact Details

Zippy Finance 

PO Box 3078
North Turramurra
NSW 2074

T 1300 855 022 

Louisa Sanghera is a credit representative (437236) of BLSSA Pty Ltd ACN 117 651 760.  Australian Credit Licence 391237. ABN 85 168 278 975.

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