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With Aussies en masse seeking to save on their mortgage, the question I’m asked most often is: how do I identify the best-value home loan? Actually, people usually ask for the “cheapest”, but that’s only what they think they want.
There are now 137 basis points between the RBA’s published average discounted rate of 7.06 per cent – which has been creeping up after the end of previously cut-throat pricing – and the most competitive, quality, comparable mortgage.
When you choose a new mortgage, there are some key questions to ask yourself upfront.Credit: Glenn Hunt
On a typical $593,475 mortgage, the 5.69 per cent best-of-breed rate represents a saving of $505 a month, $6062 a year and $151,560 over the life of a 25-year loan. I’ll tell you what loan this is in a minute, but let me explain what – for today – makes it stand out.
When you choose a new mortgage, there are three questions to ask yourself upfront.
An offset account allows you, essentially, to use every dollar you have to your name twice – both for its intended purpose and to save you loan interest. It is quite simply a savings accounts that is connected but quarantined from your home loan.
The fact it is connected means every dollar you have sitting in your offset account is netted off – offset from – your loan balance. So, if you have $10,000 in an offset account alongside a $100,000 loan, you will pay interest on only $90,000.
Now two things make this smarter than a regular savings account:
- You’ll save more in home loan interest than you will earn in a savings account. That’s just how debt and deposit rates roll.
- Because you are saving rather than earning it, you won’t be slugged tax.
But you may well be thinking: “She has forgotten the cost-of-living crisis … I don’t have dollars to my name!”
Fair point. But consider any money, from a holiday stockpile or school fee stash to your emergency fund. An offset is the place for it all.
An offset also opens up a hugely powerful debt-reduction strategy – paying your salary into one.
If you are disciplined, you could even put your expenses for the month on a credit card, and so leave your salary sitting in the offset all the way until the monthly bill – which you must pay in full for the strategy to work – is due.
These are effectively free savings … you still get to deploy your dollars where you need, when you need.
So why, before, that key word “quarantined”?
Because by instead of keeping your cash directly in your home loan and relying on a redraw from that loan, you run the risk you will be prohibited from getting it out when needed.
Lenders have in the past recalculated loan balances and subsumed savings. And if you get into financial strife, that money will be held away from you faster than you can say “financial hardship”.
Genuine offset accounts can only be offered by what are called authorised deposit-taking institutions; though many cheap-as-chips online lenders duplicitously call their redraw facilities offsets. Note these accounts don’t come with the protection of the Australian government deposit guarantee of up to $250,000 either.
Mozo says that today, the market-leading variable, owner-occupier loan from an authorised deposit-taking institution, with an offset account – the filter you should always consider applying for all the reasons above – is from Bendigo Bank-backed Tic:Toc.
You should be paying no more than 5.69 per cent.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me. Follow Nicole on Facebook, Twitter or Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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