The faster you pay off your mortgage debt, the better off you'll be financially. But in many cases, you may be in a better position if you make extra mortgage repayments into your offset account instead of straight into your mortgage. This means you don't completely pay off your mortgage as soon as you could – but the options, flexibility and freedom you hold on to could make it well worth it.
Whether or not you should sink your money into your mortgage or into an offset account depends on you and your individual situation. Here are some examples to help you work out whether this makes sense for you.
Using an offset when your loan is almost paid off
Let's say you have a mortgage and you still owe $400,000. However, you also have around $370,000 in your savings offset account. You could either pay off the majority of your loan or leave your money in your loan's offset account.
Effectively, leaving it in the offset account is the same as paying it off – in the respect that you are not paying any interest on the majority of your loan. In fact, you're only paying interest on $30,000 worth of principal. This means your repayments are mainly going towards paying down the principal, so you'll be mortgage-free in a much shorter time-frame.
Now, you have two options:
- Pay off your mortgage. Keep adding to your offset account until you reach $400,000, and then pay off the loan. You're now out of debt – but all the money in the offset is gone.
- Keep it open. Keep adding to your offset account, but don't close out the loan. Your debt is small and you have a lot of money you can easily access. However, you're still making a full monthly mortgage repayment (the majority of which goes towards the loan principal, not interest).
In this scenario, assuming your monthly mortgage payment is $2,000, around 95% of that repayment would repay the loan principal, and less than $100 per month would go towards interest.
This allows you to repay your home loan far more quickly, while also keeping your savings balance high. It means your money is still accessible when and if you need it.
Using an offset when you still have a large loan
Even if you don't have as much savings, it can be beneficial to put your money in an offset account rather than putting it into your mortgage.
For instance, in the above scenario if you have $10,000 in savings instead of $350,000, it can still be useful to have access to that money for emergencies. By placing the money into your mortgage you would save on interest but you would no longer have access to that $10,000 if you needed it.
In fact, you'd save the same amount of interest whether you put the money into an offset account or into the mortgage.
The big difference is that when you put the money in your offset account, you have ready access to it.
Is it better to keep money in offset than in your mortgage?
The decision on whether to park your money in your offset or mortgage account is up to you, as there's no right or wrong answer – it depends on your personal situation, risk profile, overall debt and timeline remaining on your loan.
Here's the thing about owning property: while your home might be worth a lot, it's much harder to turn bricks and mortar into cash when you need it. This means that if you want to access your money quickly, you have to sell your property, and it can take some time to market your property, find a buyer, complete the sales transaction and get your money.
However, when you have money in your offset account, the money is yours and you can access it – and spend it – quite easily.
Keep in mind that when you keep your money in your offset account, your repayments stay the same each month; however, you are not paying as much interest, so you pay the loan principal down more quickly.
Keeping money in your offset account vs paying off the mortgage
- Flexibility. If your remaining mortgage debt is small then it's not costing you much to keep it, and you can use the money in the offset account for emergencies, investments or other expenses.
- Interest. Withdrawing money from your offset account means you pay more interest.
- No debt. You're out of debt and you own your own home.
- Emergency fund. If something goes wrong you can easily take money out of your offset account and access it, fast. If you have a separate account with money in it for emergencies, this is less of an issue.
- No rainy day fund. As soon as you pay off your mortgage, all the money in your offset account is gone. Congratulations, you own your own home. But it's hard to take money out of your house.
- Ongoing repayments. Even though you're not paying any interest (if your offset amount is the same as your loan amount), you'll still need to make your mortgage repayment each month. You'll keep doing this until the full loan principal amount is repaid.
- Ongoing fees. If your mortgage has ongoing fees you'll keep paying them as long as you keep the mortgage. This cost could be minimal, but it's something you need to consider.
- No fees. No mortgage means no fees. Easy.
- Buying another property. If you decide to move or buy a second property you can use the funds from your offset account to cover the deposit.
- Investing opportunities. You could buy a second property and live in it while turning your current home into an investment. This allows you to shift money to the mortgage on your new home and keep paying off the investment (this is advantageous because you can deduct interest expenses on an investment property from your tax).
- Buying another property. It can be harder to sell your property then buy a new one. If it doesn't work out you might need a bridging loan or a line of credit to cover your deposit. This means extra work and potentially extra costs.
- It can get complicated. Having a mortgage is just one more thing to worry about, and this strategy does require you to pay more attention to your finances.
- It's easy. If you just want to get out of debt then you might want to repay the mortgage and never hear the word "mortgage" again.
The above information might not apply to you, of course. Your loan might not have an offset account, in which case you've just been paying your loan off. And you might have extra savings set aside, meaning having the flexibility of the offset account is less important to you.
Also, you might be the kind of person who just wants to close their mortgage and move on with their life.
In this hypothetical scenario, Max has $250,000 left to repay on his mortgage. He also has $250,000 saved in a linked 100% mortgage offset account.
But thanks to the balance in the offset account cancelling out his outstanding debt, Max doesn't have to pay any interest on the loan amount. So rather than paying off the loan in full, he could keep making his regular loan repayments and still have access to the $250,000.
He decides to put the money he is saving on interest repayments into a high-interest savings account to further boost his savings balance. Later on, when Max's car breaks down he pulls $10,000 out of the offset account to buy a new car. His offset dips down to $240,000, meaning he has to pay interest on the $10,000 as he pays it back. This is still much cheaper than getting a car loan, not to mention much easier and less stressful.
Whether or not you will be better off paying off your loan or keeping the money in your offset account depends on a range of factors, including your financial circumstances and how you feel about keeping a mortgage in place for any longer than necessary. Consider chatting to a financial planner or a mortgage broker to get advice tailored to your personal situation and needs.
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