It’s all about balance: Using an offset account to your advantage

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Want to avoid sinking your entire savings balance into your mortgage? An offset account could be the solution you’ve been looking for.

An offset account is straightforward to set up and easy to understand. It also has the potential to save you thousands of dollars and could shave years off your mortgage.

Got your interest yet?

Yup! But what’s an offset account?

Basically, an offset account is a regular transactional account which is linked to your home loan.

The advantage is that you only pay interest on the difference between the money in the account and the mortgage.

Banks usually offer two types of offset accounts – full offset account, or partial offset account.

A full offset account means that the entire amount in the account is deducted from the principle before you start to pay interest.

In a partial offset account, a reduced interest rate on the mortgage is offered on the equivalent amount in the offset account.

Whichever you choose will depend on the bank and the type of mortgage you have.

How does it work?

Say you owe $350,000 on your mortgage, and have $50,000 in a savings account that you currently use for regular transactions.

If you move that $50,000 into a full offset account, you’ll only pay interest on $300,000 (which is the difference between that amount and the loan principle).

The offset account can then continue to be used for all your daily needs, like receiving your salary and withdrawing cash.

Why else would you consider an offset account?

Well, say for example that you had a savings account with a 3% interest rate and a mortgage with a 5% interest rate.

By allocating money into your full offset account, you’d save more money on interest than you would earn in your savings account.

Additionally, interest on your savings accounts are subject to tax, whereas the interest-saving on your mortgage isn’t.

How much can it save me?

Under the right circumstances, a lot.

Using the example above, if you’re 35 when you take out a home loan, you could shave years off a 30-year loan term just by keeping $50,000 in the offset account.

This means your loan could be done and dusted right in time for your retirement.

Is it right for me?

Of course, there are some additional factors to consider, such as account keeping fees and the minimum amount needed in the account to make it useful.

As everyone’s situation is different, get in touch and we can discuss whether an offset account might be suitable for you.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.

Top Ten Mortgage Broker Secrets

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Ten questions to ask a mortgage broker Using a mortgage broker to help you choose a home loan can save you considerable time and could result in huge savings. However, before you decide on a broker, you need to make sure they’re going to meet your needs. Here are some questions to ask. 1. How […]

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How Much Does Your Credit Card Affect Your Borrowing Capacity?

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Did you know that $1,000 extra on your Credit Card limit can reduce your borrowing capacity by up to $5,500 with some lenders? This can mean the difference between owning a property and not.

Let’s assume our client, Ian, earns 80Kpa. and has a credit card of 10K, no other debts and is single…Now, let’s see how much we can borrow with this 10K card limit and for the exercise we’ll pick Homeloans Ltd as the preferred lender…

10K = 520,074

9K = 524,429

8K = 528,783

7K = 533,137

6K = 537,492

5K = 541,846

This shows that for every $1K of extra credit card limit, your borrowing capacity in this instance reduces by approx. $4350.

TIP: When your bank sends you an invite to increase your credit card limit have a bit of a think before blindly accepting their offer. With this example, bigger was to better.

Seven Easy Ways To Smash That Home Loan!

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Pop the Cork, You Now Own the Property

Now that you have your home loan and have moved into your brand new home, here are some really cool ways to pay it off fast. The following techniques are guaranteed to help pay down your loan faster, which will save you interest.

 

1 – Pay It Off Quickly

The quicker you pay off your mortgage, the less you end up having to pay on it overall. As an example, let’s say that you just got yourself a $400K loan at 6% over a 30-year term. This would mean a principal and interest repayment of $2398 per month. Over the 30-year term, your total repayments would amount to just over $863,000 to pay back the original $400,000 loan.

However, if you have enough spare income to pay an extra $1000 per month, it would reduce your home loan term by a staggering 15yrs and 2 months, saving you over $258,000 in interest. You could put that money to good use and maybe buy an investment property. I am not advocating that you live like a pauper; just make extra repayments when you can. You still have to enjoy life, so don’t be a slave to your mortgage.

 

2 – Make Accelerated, Fortnightly Repayments

It is easy to make an extra monthly repayment each year without really feeling the squeeze. Simply divide your monthly payment in two and then pay fortnightly instead of monthly. You would make what equates to 13 payments each year instead of 12, as there are 26 fortnight’s in a year.

By doing this, instead of paying $28,776 per year, you would actually pay $31,174. This simple adjustment in the payment schedule can shave up to 4.5 years off your 30-year loan term and save you around $69,000.

 

3 – Can You Pretend the Interest Rate Is Higher?

As I currently write this, 400K loans receive an interest rate of around 4.6% pa from some of the major lenders, requiring a repayment of only $2051 per month. If you can afford to pretend that the rate is 6% and pay $2398 per month, this self-imposed buffer of 1.4% would mean that you are paying an extra $347 per month.

If you can do this, you will cut your 30-year loan term down to about 21.8 years. Even if 1.4% is not achievable, paying more than is actually required each month, regardless of how much it is, brings down the length of your loan term.

 

4 – Do I Really Need To Buy That?

Maybe you think it will be too hard to come up with the extra money to put toward the loan. While the methods I have described should be fairly painless, you may find them even easier to actualize if you take control of unnecessary spending. Are you still paying your gym membership, even though you haven’t been there for the last 6 months? Can you give up the smokes? Do you buy your lunch and two lattes every day?

When I had my music shop, I used to buy lunch and have at least two coffees a day. The total cost was about $18 per day (lunch, $12 and coffee, $3.50each), or $90 per week. Allowing for 4-weeks’ leave per year, that equates to $4,320 per year. What would happen if I bought my lunch 4 times a week and had just one coffee a day? My weekly spend would go down to $29.50 per week, giving me just over $60 per week to put towards my mortgage. That equates to $260 per month. I think you get the point.

I am sure there are areas that, if you were honest with yourself, you could find ways to save some money. When you shop for groceries, make a list and stick to it. Cut out impulse buys; do you really need that brand new car when one a few years old will cost considerably less. Can you do public transport?

 

5 – Lump Sum Payments

Many people routinely receive a large chunk of money, and they generally have all sorts of plans of what to do with it. These may be a lump sum from a tax return or a work bonus. Instead of spending it on a holiday or a new wardrobe, consider putting it towards your mortgage.

A lump sum repayment of $5000 on a $400,000 loan in Year 2 of a 30-year loan, with an interest rate of 6%, will reduce the loan term down to 29 years and 1 month, saving you over $21,000 in interest. Imagine how much it would reduce your loan if you were to receive a refund or bonus every year of a similar amount and put each one toward your mortgage.

The following website has a simple calculator you can use to see how a lump sum payment lowers the loan term and overall cost of the loan.

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6 – Use an Offset Account

An offset account is a transaction account linked to your variable-rate home loan. The money in that account offsets your loan balance. The more money you have in the account, the less interest you pay on your home loan. Instead of putting your spare cash into an interest-bearing account, where you earn very little interest and pay tax on the interest you do earn, transfer any spare money you have into your offset account.

Let’s say you could keep a balance of 10,000 per month in your offset account against your $400,000 loan, with an interest rate of 6%. This means that the bank only charges interest on $390,000. The interest payable on a $400,000 loan at 6% is $2,000per month. However, on a $390,000 loan at 6% the interest is $1950 per month. You actually make an extra $50 repayment per month. As a result, you would save around $46,874 in interest and shave about 1yr and 7 months off your 30yr loan term.

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Most lender website’s have these calculator’s that you can use to see how extra repayments can lower the time of your loan and interest saved.

To make your offset work better for you, have your salary or wages paid into your offset. If your pay goes directly into your offset account, it immediately reduces the interest you pay on your home loan. Even if it’s only in there for a couple of days, it adds up, and you can still take your money out as with a normal bank account.

With this set up, use your credit card for everyday purchases. To do this, you need to be a disciplined spender, and you need to know how much your monthly expenses are. Keep enough money for your expenses (groceries, utility bills, etc.) in your account, but use your credit card to pay for them instead. This allows you to keep the maximum amount in your account at all times, offsetting interest.

Then, at the end of the month, transfer the money you have set aside from your offset account and pay off your credit card balance in full so that you don’t accrue any credit card interest. It is crucial that you set aside the money for your expenses in your account so that you’re able to pay off all the expenses you’ve put onto your credit card at the end of each month. If you’re not able to do this, you’ll end up paying interest on your credit card. If you’re not disciplined with your credit card, this may not be the best option for you.

 

7 – Consolidate Your Debts

Many people carry a personal loan at 12% interest and have a couple of credit cards, which they don’t clear the balances on each month, potentially accruing interest charges in the vicinity of 18-20%. Assuming that you have a bit of equity in your property, you may be able to consolidate these debts into your home loan, bringing the interest rate down to 5-6%.

Here is how to make this really work for you; pay the new consolidated loan the sum total of all the original loan repayments. This means that you pay extra off your home loan without really feeling it; you were already paying that same amount every month.

 

Another left of centre way to reduce one’s mortgage will be revealed in another blog…stay tuned

 

How does a Business Owner get a Home Loan?

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By paying tax, that’s how!


The Rules of Lending have changed and this is having a dramatic impact on Business Owners wanting to borrow for a home.

It has not become any more conservative and credit policies have not contracted all that materially from 12 months ago.

What has changed is that lending decisions today are becoming increasingly more evidence-based than ever before. And they need to be, to be compliant. This then leaves very little scope for “exceptions”

What This Means for You?

3 things:

1.    It will be your “taxable income” as evidenced by your ATO Returns that will determine what you can borrow.
2.    How consistent your earnings is as important as how much you earn
3.    No amount of cash deposit or real estate collateral will have any impact on 1. and 2. above

Taxable Income

•    This is the key driver that determines how much you can borrow.
•    The lender will ONLY accept as “taxable income” what you declare to the ATO
•    If you don’t declare your cash earnings, neither will the lender!
•    If you claim all your travel, holidays, food, and household expenses as a tax deduction to reduce your “taxable income”, then so will the lender!
•    2 consecutive years evidence, no more than 12 months old
•    Where earnings are inconsistent, use the average

This is making it difficult for some Business Owners because “what they declare” in no way represents what it is they actually earn.

Last time they needed money, they only needed to “declare” an income, self-witnessed. Now they need to prove it and not just with some internal MYOB printout, but full and complete set of ATO Returns.

Business Owners need to appreciate that it doesn’t matter what you OWN or how little you OWE. It is what you EARN that determines HOW MUCH you can borrow.

For example, if you own $10 million worth of real estate unencumbered, but declared just $20,000 a year “taxable income”, you could only borrow @ $35-40,000 *.

*Assumes single applicant, no dependants, no other loans or financial commitments 20/10/10

How to Survive now the Rules of Lending have Changed

  •  Get Finance Approval IN WRITING BEFORE you go shopping!
    •    It’s all about “taxable income” so keep your ATO Returns up-to-date
    •    PLAN BEFORE YOU BORROW. If you intend borrowing, alert your Accountant ahead of time so that you can make financial plans and perhaps change strategy from tax minimization to income maximization for the next 1-2 years.
    •    Remember, once its down in “black and white” it’s there forever!
    •    A low “taxable income” may negatively impact how much you can borrow for the next 2 years.
    •    As a general rule, the higher your “taxable income” the more you can borrow
    •    So it may be in your best interests to pay a bit more tax today if it means being able to afford your dream home tomorrow.

 

For example:

Small Business A
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Small Business B
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Small Business C
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*Based on Citibank Serviceability Calculator 20/10/10. Assumes single applicant, no dependants, no other loans or financial commitments

 

What about Lo Doc loans?
There is much uncertainty and many conflicting opinions about the future of these types of home loan products, as they stand today.

Released a decade ago, these loans were originally designed to suit the needs of Business Owners whose financial records were either unavailable or not reflective of the current financial position of the business.
Instead of producing ATO records, the Business Owner only had to “declare” an income based on his own self-assessment of what his business currently earns. No further questions asked.
Depending on equity, today that same Business Owner will have to supply:

  •  Evidence of ABN registration 2 years
    •    Evidence of GST registration 2 years
    •    BAS Statements and/or Bank Account Trading Statements for the past 6-12 months

And will be charged more and be required to have a higher deposit than Business Owners who are able to borrow “mainstream”.
Talk to your Mortgage Broker

Speak to a suitably qualified Mortgage Broker who has experience in dealing with Business Owners for professional advice on:
•    How much you can borrow
•    Which lenders best suit your needs as a Business Owner
•    What products you should consider
•    How to best structure your finances
•    What documentation you will need to prepare, and
•    Making the finance application