What’s your savings account and why do you use one if you have an offset?
If you have funds going into an account other than your offset it makes sense for them to be paying your mortgage so the offset stays as high as possible. Even better, get everything paid into your offset and then pay mortgage and everything else from there.
Ah ok. I am first home buyer so had to idea we can do this. I'll close all my accounts today and just use offset for everything.
Some banks don't allow yountondo everything from an offset so might not want to close the others yet. But the Odra is to keep as much as possible in there. It basically free tax efficient money by doing so.
How is it taxfree? Like I am not getting any interest like HISA ?
Yes. Instead of being taxed on interest you earn, youre avoiding interest you would be charged.
But isn't interest "free money"? Even if it gets taxed I am not losing anything.
The interest you earn is the bank paying you for borrowing your money. Conversely, the interest you pay for your home loan is you paying the bank for borrowing their* money. (*the bank's money is actually all the bank's client's money)
The interest the bank wants from you is almost always going to be much higher than the interest they give you for borrowing your money, as they want to make some money as well. Hence it's almost always more worth it to minimise the amount of money you lose to the bank's interest than you gain from your interest.
Hypothetically if you had 400k in savings at 3% and had a 400k loan from the bank at 6%, it's obvious that the interest you get from the bank will be less than the interest the bank is getting from you. But the trick here is that your 3% is less than that due to tax since it's money gained, but the 6% is the same since it's money owed. So it's more effective to avoid being charged interest from a tax point of view as well.
Understood. Thank you so much
Usually the interest on savings accounts is about 2% lower than mortgage rates. And youre taxed.
Using made up figures, of you had 10000 dollars on savings you might earn 400 bucks in a year. You'll get faced a hundred and end up with 300. With an offset, you'll pay 600 less in interest and pay no tax on it. So effectively double the return.
So you have lost 300, in my example but never notice.
Understood. Thank you :)
No real benefit, just changes the account you need to ensure has enough funds available. I had a similar setup previously, just used the redraw as the savings since you get a better interest rate.
I don't know about other banks, but the CBA now lets you nominate multiple accounts as offsets, plus having a mortgage redraw account. That way, it doesn't matter where your money is kept, it all counts towards reducing your interest. Makes a difference.
Thanks
American here, I'm jealous of this element of your mortgage system
No, noting about our system is to be admired.
You have socalised mortgages through Fannie and Freddie and can budget knowing rates will be locked for decades because that's how they operate your banks have to do the same.
We have shitty WAY overpriced housing, some of the most expensive in the world in a small country (gazillons of acres but not many people) at the bottom of the planet ffs, we have poorly built housing stock with poor building codes (thin walls and slap giant HVACS on the side with no though to effiency) and cost a fortune to run
We only have privates mortgages with nearly all floating rates, we have a mostly protected cartel of lenders, the so called Big 4.
All our mortgages are full recourse, banks can persue you in perpetuity if u get I to trouble.
And 100s of other terrible things..
I hear ya, I know Canadian mortgage terms are renegotiated every couple years and that always sounded awful.
I was watching EEVBlog one day and Dave mentioned the offset account and I looked it up. That may be the only good part of your system. Here in America, the closest thing to that is a Home Equity Line of Credit, which is essentially a second mortgage but with not-so-good rates.
My bank allows me to choose as many accounts as I want to become offset accounts so check if that's available as an option for you. That way it'll make no difference.
We throw a bit over our mortgage every month into our offset. The offset account is nearly 40k, and it counts towards 'paid off' for interest purposes. It's worth doing as it can grow your offset, and reduce your payments. Think of it as extra payments you can 'claim back' if need be.
Thanks
Pay your mortgage fortnightly not monthly.
As an example, imagine you take out a $400,000 loan for 30 years at an interest rate of 3.64%. Your monthly payments will be $1,827.58. Over the duration of the loan, the total amount you repay will be $657,931 including both principal and interest.
If you switch from monthly to fortnightly repayments, you’ll be paying an extra $1,827.58 each year. This will cut the time it takes to repay your loan by four years and ten months. You’ll also save $38,145 on interest charges.
Wow! That's great info. I'll get it changed to fortnightly. Thanks