Sometimes it makes better financial sense not to pay off your home loan.
It might seem counterintuitive to delay paying off your home loan any longer than necessary. But 100% offset accounts, which reduce the amount of interest you pay on your home loan, can actually give you a good reason to keep your mortgage a bit longer. Because an offset account can cancel out the interest you would normally pay on your mortgage, you could be better off using your money to invest rather than paying off your home loan. Let's take a look at a case study.
Max has $150,000 left to repay on his mortgage and still has 20 years of the 30-year loan term remaining. He also has $150,000 saved in a linked 100% mortgage offset account.
On one hand, Max could use the money in the offset account to pay out the rest of his loan. This would mean that he would own his home in full and could start saving for the future with a clean slate.
But Max’s current situation also presents another opportunity. 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 then access the $150,000 in the offset account to invest. He can also put the money he is saving on interest repayments into a high-interest savings account to further boost his savings balance.
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Offset accounts could potentially save you thousands in mortgage repayments over the life of your home loan.
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Pros and cons of keeping money in your offset account
There are benefits and drawbacks to each of Max’s options in the case study above, and they’re worth closer examination to help reach the right financial decision.
- Access to funds. This approach allows you to access the money in your offset account to invest in shares or other property, to pay off other debt or even to fund renovations.
- No interest. Thanks to the funds in your offset account, you won’t have to pay any interest on the outstanding loan balance.
- Cash buffer. If you pay the mortgage off in full, this means you have no money in your offset account to access in an emergency. Keeping money in your offset account allows you to create a rainy day fund that provides protection against the uncertainties of the future.
- Future opportunities. You may decide in the future to use the money in your offset account to help fund the purchase of another property and turn your current home into an investment property. In this case, the interest repayments on your outstanding loan balance could be tax deductible.
- The property isn’t yours. The bank still has a claim to your property until you pay the loan amount off in full.
- Complicated. Many people prefer to pay their mortgage off in full and have the weight of debt lifted from their shoulders. This allows them to clear the financial slate and then start saving for the future.
- Inflation. Due to the effect of inflation, the “real value” of the savings in your offset account will decrease over time.
- Fees. The lender may charge fees in order to maintain your offset account, and there may also be ongoing fees that apply to your loan.
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. Chat to a financial planner to get advice tailored to your personal situation and needs.