If you are fortunate enough to have sufficient funds in an offset account to settle your mortgage, you might instinctively opt for immediate repayment.
However, it’s prudent to consider all your financial options before making such a decision. There are actually two good reasons not to pay off your home loan straight away.
At First Financial, our mission is to guide clients in making informed financial decisions, ensuring long-term success. We can support you on the pathway to wealth, empowering you to achieve financial freedom and a retirement you can enjoy.
Understanding offset accounts
An offset account is an alternative to a traditional savings account model. Rather than accruing taxable interest on your savings while simultaneously paying interest on your loan, you maintain your funds in an offset account that’s directly connected to your home loan. This arrangement effectively lowers the interest owed on your loan, offering the potential for significant savings over time.
When the bank is working out your interest, it is calculated on a daily basis, even if you are only billed monthly. By depositing your income into the offset account, even if you’re spending a good portion of it on groceries, loan repayments and other expenses, for every day it sits in an offset account, it saves you interest on your home loan.
Although your home loan repayment amount remains constant with an offset account, a larger portion of each payment goes towards reducing the principal rather than the interest. Consequently, this accelerates the repayment of your loan.
When your mortgage is fully offset
Once your offset account balance matches the outstanding mortgage total, your home loan is considered fully offset.
At this stage, you cease paying interest on the mortgage. While you can maintain monthly repayments, the entirety of these payments goes toward reducing the principal, with none allocated to interest.
You have the option to arrange automatic mortgage payments from the offset account over the loan term. However, you might be wondering whether it’s more advantageous to pay off the mortgage entirely. Although the prospect of eliminating the debt seems appealing, there are two compelling reasons to consider delaying this action.
Reason 1, you’ll lose access to it
The most obvious drawback is the loss of fund accessibility. While paying off your mortgage is attractive, once you use up your offset balance, it’s gone. This confinement of resources might restrict your financial maneuverability since liquidity is crucial for unforeseen expenses or investment prospects.
However, if you have other readily available resources, such as a well-funded emergency fund or accessible investments, this concern may not be as pressing. Being prepared to handle unforeseen circumstances without relying solely on home equity is advisable.
Maintaining access to your funds ultimately offers flexibility and security, especially in uncertain times. Before paying off your mortgage, weigh the benefits of debt reduction against the importance of maintaining liquidity and financial resilience.
Reason 2, you want to purchase another home
If you’re thinking about buying another home while turning your current primary residence into an investment property, hold off on using your offset balance for now. Whether upsizing or downsizing, this money can serve a better purpose than paying off your current mortgage.
As stated previously in the first reason, when you utilise your offset account to pay off your mortgage, you forfeit access to those funds. An alternative approach would be to utilise the funds in your offset account as the deposit for purchasing your new family home rather than borrowing against the equity of your current home.
By keeping borrowed money against your current home, which is now a rental property, it becomes tax deductible. This allows you to put a large sum of money down as a deposit on your new home, meaning you only need to secure a minimal personal mortgage to complete the purchase.
Talk to the experts in financial planning
Is your offset account nearing or already equal to the balance left on your mortgage? If so, you have options to consider. You could pay off the loan and own your home outright. Alternatively, you could continue making current repayment amounts to maintain access to your liquid asset. Or, you could utilise that money for a new home, keeping your existing one as an investment property.
At First Financial, our experienced financial advisers can help. They will discuss your goals and objectives and guide you to the best options. Contact a member of our friendly team to learn more today.
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