If you’re like most people, your mortgage is the biggest financial burden. The idea of having that burden hanging around your neck for 25 or even 30 years is not something that’s appealing for anyone, so I’ve prepared a couple of tips to help you get the most out of the loan options and get on top of your finances.
1) Use a Mortgage Offset Account
One of the top ways to reduce this burden is to use a mortgage offset account.
A mortgage offset account is an account linked to your home loan that allows you to reduce the interest charged on your loan. Lowering the interest cost on your home loan while making your regular monthly loan repayment, results in a shorter loan term and a substantial savings over the term of the loan.
There are many different variations of offset accounts, but the best option is the 100% Offset account – also known as a Full Offset account, combined with a full transaction account. Just like its name this account allows for 100% of the balance in the account to be offset against the account balance of the home loan it is linked to and reduces the balance on your home loan by this amount when interest is calculated. The full transaction account allows you to do all your everyday banking such as direct credit of your pay, direct debit of your regular bills, deposits, withdrawals, ATM transactions, EFTPOS and Internet Banking all through the one account.
Any money in this account, from $1 up to the balance of your home loan, is offset against the amount owing on your home loan and you only pay interest on the net balance (the difference between the two accounts). Say, for example, that you have a home loan of $200,000 and, during the interest calculation period, the lowest balance of your offset account is $20,000, you are only charged interest on $180,000.
Let’s use the above example to compare a home loan over 30 years at 6.7% with principal & interest repayments of $1,290.56 per month.
Total interest over the 30 years of the loan would be $264,600. With $20,000 deposited in a 100% offset account you reduce your interest cost by $94,970 and repay your loan 7 years and 5 months earlier.
So it makes sense to switch from an everyday account to an offset account and have any excess pay working for you to reduce your interest each month and pay of your mortgage faster.
2) Create a Financial Budget
In order to know how much excess pay you have, you need to have a budget. A budget gives you control of your money. If you are living from pay to pay then your money is not working for you. You need to have visibility of how you are spending in order to understand where savings could be made and allow you to make informed decisions about what you need to do to secure your financial future.