Tag: mortgage offset

Your Questions Answered: How to Free Yourself From Debt

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My husband and I sought financial counselling last year. We had a LOT of debt. Subsequently my husband has gone bankrupt and I have consolidated my debt into my home loan (in my name only).

We need to eventually buy a bigger home as our 5th child is on the way. Now that our finances are more manageable we can now save. Our financial goals are:

  1. To save $5000 in savings
  2. To save for a home deposit in the next 3-5 years
  3. To pay off our mortgage (long-term goal).

Would it be better to put our savings into a high interest online savings account or open an offset account? Our mortgage is modest $285,000. Our combined taxable income is $140,000 pa.

I am also considering investing in shares once I have a savings nest. Would you recommend this?

Cheers, S

Hi S,

Thanks for writing in. Libby and I love this question because you and your husband have already proven you’re prepared to make the tough decisions when it comes to money.

It’s not always going to be easy to rectify bad habits and past mistakes, and you have to be prepared to make sacrifices, but we can tell you’ve got it in you!

Now that your debts are consolidated and your husband’s bankruptcy is in the past, you are quite rightly looking to the future and thinking about how to build wealth.

Your financial goals make a lot of sense, but we think you can go one better. Set a deadline for when you want to have saved that $5,000 emergency fund, and a specific date to have that home deposit. Once you set these dates, put a savings plan in place to help you get there, and make sure you stick to it.

The best place to store those savings at the moment is likely your mortgage offset account. Money in your offset account offsets your loan principle and saves you interest, meaning you’re earning an effective return equivalent to your home loan interest rate.

Not only is this rate likely higher than the rates on offer in high interest savings accounts, it’s also tax free, whereas interest earned in a savings account incurs tax at your marginal tax rate. The money is also readily accessible if you need to use it.

In regards to shares, we’d suggest looking into this when you have some savings behind you given the increased risks of investing.

Finally, good on you for going to see a financial counsellor, these people do an incredible job in the community.

Financial counselling is a free service offered by governments and some charities that connects people in financial difficulty with a money expert. It’s an invaluable service which has helped countless people, and you can find out more about it here.

Ask Kochie: what’s the deal with mortgage offset accounts?

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Should I keep all of my savings in a mortgage offset account, or is it better to keep a separate savings stash in a high interest savings account?

While those in the know might think this is a simple question, the answer actually has two parts to it. The first part is easy… yes, it’s better to keep your savings in the offset account (or a redraw facility, which is a similar concept).

Money in an offset account serves to reduce the principle component of your home loan, meaning you’ll save big on interest and will pay off your loan faster.

For example, say your mortgage interest rate is 5.5%; money in a 100% offset account is effectively earning a guaranteed after tax return of 5.5% each and every year.

 

Say your mortgage interest rate is 5.5%; money in a 100% offset account is effectively earning a guaranteed after tax return of 5.5% each and every year.

 

Not bad considering you’re lucky to find a high interest savings account paying 3% at the moment… plus you have to pay a chunk of that to the ATO come tax time.

A typical strategy to make the most of an offset account is to keep all of your money – savings and income – in the offset, and cover day to day expenses on a credit card which is paid off in full via the offset every month.

But here’s where the second part of the answer comes in; many people we speak to say keeping all of their money in an offset account just doesn’t ‘feel’ right.

For starters, it’s harder to keep track of your spending when it’s all caught up in the offset account. And when there’s so many debits and credits going on in the account, you don’t get that warm and fuzzy feeling of watching your balance climb steadily each month.

We spoke to Brenton Tong, financial planner and founder of Financial Spectrum, about this.

And while he agreed mathematically the offset account is the best place for your savings is, he realises it can be unsettling to not have a clear picture of where your money is going.

The solution, according to Brenton is to get organised. Set up a budget and keep track of your spending independently.

And, he says, look into your options. “Some lenders allow you to keep multiple offset accounts, so you could have a ‘savings’ offset and a ‘spending’ offset. This could help you budget more effectively if you need to keep your money separated.”

  • An offset account can help you save on interest and pay your loan off faster.
  • It’s still important to budget and keep track of your spending.
  • Look for offset accounts which are 100% offset against the loan balance.
  • Other desirable features include unlimited withdrawals and no balance limits.
  • Always pay off your credit card in full every month.