How would you like to find out about a tool for your mortgage that could save you hundreds of thousands of dollars in repayments over the lifetime of your loan?
Today I’m going to tell you about a facility that a lot of people overlook when they’re setting up their mortgages and it will literally save you tens, if not hundreds of thousands of dollars in your mortgage over the lifetime of the loan.
Firstly, let’s consider our loan, whether it be an investment property or home loan. This is predominantly debt – it belongs to the bank.
The power of the offset account
An offset account is an account linked to our loan, however it doesn’t carry any debt. It simply acts like a savings account where you can take money in and out of the account at will.
The idea is to put as much of our cash into this account as possible – savings, wages and salaries, everything.
Again I’ll reiterate you can take money in and out of this account very easily.
The beauty of the offset account is that it is linked to our loan account and the “positive” cash we have in there (like savings, wages and salaries etc.) actually acts to offset the “negative” debt that is our mortgage.
Now the advantage of offsetting the positive amount with the negative amount is that the interest that we’re required to pay within our mortgage repayments is calculated on the net figure, not the total debt.
For example, if we’re paying an interest only loan of $400,000 and we have $150,000 sitting in our offset account, then we only pay interest on the $250,000.
As you can imagine, if you put more into this offset account over time, rather than actually paying down the loan and putting the money into that, you can literally offset all the interest repayments on the loan itself.
If you’re paying a principal and interest loan, you can be putting all your money into paying down the principal directly.
Beating the banks
What you may not realise is that for the first 10 to 15 years, the repayments on your loan will only be going towards paying off the interest and you the repayments don’t even touch the principal. Using the method described above is the best way of super charging your mortgage reduction as it reduces the interest paid and can get straight to paying down the principal.
Now what I really love about offset accounts is that if you put all your extra funds into an offset account rather than paying down the loan directly you have direct access to the money.
If you want to access those funds in the future, to use to buy another property or whatever, you don’t need to apply to the bank to refinance the funds, you can simply withdraw the money and get going.
Of course, you’ll still have to make mortgage repayments, but you can save yourself all the time and expense of applying for another loan!