The RBA announced another rate rise in November after four consecutive months with no movement. As some experts predict more on the way, there is no time to waste when it comes to saving on interest repayments, especially if you have a variable rate loan.
One powerful loan feature that may be available to borrowers with a variable interest rate is an offset account, but only if used optimally. Money parked in your offset account is excluded from the principal amount for interest repayment calculations. With that in mind, here are a few tips to ensure you use your offset account effectively – so you can pay off your loan quicker and save on interest repayments in the long-run.
The interest payable on your loan is calculated daily, so having as much money in your offset account even just for an entire day reduces your interest over the years. Consider having your salary and all other income streams including possible tax refunds and lump sum inflows paid into that account. If possible, make all transactions straight from the offset at your convenience and avoid transferring money out of the account if unneeded.
On the same note, making use of a credit card to pay for daily expenses before settling it at the due date can prolong the cash staying in the account, and therefore improving your savings. It is crucial that you stay disciplined with this strategy to avoid hefty credit card interest expenses!
Offset accounts are not always included with your loan and could instead come with an ongoing fee or reflected through a higher interest rate. If you’re not careful about maintaining a healthy balance, keeping the account open could cost more than it could save. It is also worth noting that some accounts only partially offset the amount, or some may require a minimum balance before you get a benefit.
The real financial rewards of an offset account are reaped after many years, so it is always worth thinking about the opportunity cost for other uses of those funds. To illustrate its benefits, a $20,000 offset balance in a $500,000 loan and a 5.94% interest rate could net over $150,000 in total interest savings over the life of the loan. (Figures are based on offset calculators online). Plus, it could shave 5 years off the loan term and help you achieve the debt-free dream sooner.
Any advice provided is general in nature and should be considered in line with your financial situation, needs and objectives.