Three ways to use your offset account to beat rate rises

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Across the country, Australians are pleading “enough already”.

Such is the state of emergency reserves that more than half of us – 51 per cent – would now struggle to cope with a major unexpected expense according to the latest Resolve Political Monitor survey by this masthead. That’s versus 41 per cent in just February.

By being creative with how you use your offset account you could slash thousands from your mortgage repayment bill.

And, with repayments on the average $585,101 loan jumping by $1287 in a little over a year, it’s no wonder.

What’s truly eye-watering is that the overall interest bill has leapt $386,952 to $545,844.

But you may have a financial product in your arsenal already (an Australian-invented one, in fact) that can help dramatically: an offset account.

If you don’t yet appreciate its pure repaying power, this is a savings account that sits in parallel with your home loan; every dollar you hold in it nets off your loan balance… so you pay zero interest on that amount.

You may well be thinking: “But I have no spare dollars.” Your emergency savings – what I call your Holy Shit fund – may, in particular, have been sapped up.

But if you have a mortgage, any savings you have for anything (think holidays, school fees, renovations, next car), should probably be housed in an offset account alongside it.

You will effectively save at an interest rate of 7.06 per cent (today’s big four average discounted rate) as opposed to what you could earn on the best available deposit rates (5.65 per cent from ME Bank).

You will also lose tax from what you earn, so your loan works out way better.

That average $585,101 loan at that average big four rate? If you can park $20,000 beside it, you will save $125,158 and shave more than three years off your loan term.

See, pure repaying power. And remember, you still have your $20,000 at the end – but you have also effectively turned it into a lot more.

But, even if there is no money to personally speak of, there’s another huge interest-saving opportunity: you can use a bank’s money to slash your mortgage – for free. I call this clever debt-freedom play the “offset on steroids” technique.

It requires a credit card with the longest interest-free period possible – so yes, it’s only for the disciplined money manager.

You use this credit card for all your expenses for the month so for that whole month, you can sit your salary in an offset account (you may be able to hook as many as 10 offset accounts to the same mortgage, for different, clearly labelled purposes).

You move the money out of the offset and onto the credit card, only when the monthly bill is due. But you must clear your balance in full and pay no interest (accrue those lovely rewards points as a bonus).

Say you can leave $10,000 in earnings in your offset. That saving, simply from being strategic, is $67,276 and more than 1.5 years. If you could also scrounge the $20,000 in savings, as above, you’d bring forward your mortgage freedom date by nearly 4.5 years and save $175,684 in interest.

There is also a third smart way to reduce your loan interest: pay fortnightly.

Don’t get your lender to recalculate your repayments though; just halve your monthly ones to save $137,847 in interest and more than four years in debt. (I’ve developed a free app so you can calculate your own potential savings, on Apple and Android.)

Note that this approach is so effective because, unlike the no-cost mortgage-reduction strategies above, you pay slightly more than necessary each time – $160 a fortnight on our model mortgage.

It’s a way of kind of tricking yourself into it but if you put the excess into an offset, will also slowly, almost painlessly build or replenish your financial reserves.

Vitally, to money in an offset, you retain full access and full control… without the risk of a lender refusing to let you redraw it or, indeed, absorbing it into your loan balance. This has happened before. 

Stop letting interest rates work you over; it’s time to work the interest system.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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