How to Use an Offset Account to Save Thousands in Interest Without Making Extra Repayments
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- Опубликовано: 16 окт 2024
- An offset account - managed properly - is one of the best ways to save thousands on interest and shave years off your home loan.
But you need to keep in the following key points:
a) Pay all your income (wages, rental income, investment income, etc.) into the offset account.
b) Keep it there as long as possible.
c) Use a credit card (interest-free) to pay your bills and living expenses - BUT make sure to the balance off in FULL before interest is due.
d) Whatever money you can save, lump sum you receive (bonus, inheritance, windfall, etc.)... save it into your offset account.
An offset may be a great strategy to become mortgage free faster - BUT it is NOT for everyone:
1) It can be more expensive than a basic home loan product (you can use the redraw facility to achieve significant interest and time savings)
2) It might be more beneficial to focus on reducing/eliminating expensive debt (e.g. personal loan, car loans, credit card debt, pay-day loans, etc.)
3) You might be currently spending more than you can save.
Everybody's circumstances are different.
Make sure to talk to a mortgage professional to review your options, and run some numbers.
And remember, no solution is forever.
An offset account may not be the best option right now...
....but it might be in the future.
Make sure to review your situation on a regular basis to make sure your home loan still meets your needs and is setup to be paid off as quickly as possible.
Regards,
Daniel Eigenmann
So wish they taught this stuff in school. Great vid mate.
Caveat Loan - Short term loans - bad credit loan
www.loanedge.com.au/
I could not agree more! That’s why I built my channel, because this is exactly what we SHOULD have learned in school
Banks profit form people's ignorance and impulsive decisions.
Great video, thankfully my Smart boss at work told me to do this same thing when I had 0 clue on what to do. I just did what he said and It looks it was the best advise. Offset the account, put all the salary in there, take a free credit card to use for day to day transactions, and put it to pay the full balance when its due. Thanks for the advise and illustration.
Great video. You explained it perfectly. They should be teaching this in high school, but they don't.
This video clarified unanswered questions I had on offset accounts. Thank you.
Very well explained. Is exactly how i understood how an offset account works so now i can continue with confidence knowing i am using it to my best advantage. Thanks
Absolutely loved this video. As a fellow Aussie I really appreciate your efforts mate. Thank you so much for this valuable information:)
Thanks for a great explanation, other videos still lost me
Yours hit the spot 🙏
So if you have a 10k credit card . Deposit it in the offset and just before the interest free period is due redraw back to ur cries card ? And keep the cycle going
Great video. Thanks for taking the time to do this. And like some of the others comments here, I wish someone or the school system would have taught me this information.
New subscriber here, great contents and looking forward to learn some more on this topic, Love and blessings ❤️🙏🏽😘💐
Very useful and gives me dieas as I am just looking at offset accounts here in the u.k. for my btl properties. i like the 0% credit card idea and will do that once the balance is clear. Thanks
Gratefull for your video! Makr it is so easy to understand! 👍👍
If I meet all the criteria for the offset account, would this strategy still make sense given the refinance rates are still so low on a 30 yr conventional mortgage with rates around 2 - 2.5 percent?
Thank you very much for your teaching! I should have this listen years ago! Really appreciated
Thanks for sharing this information Daniel. What are the tax implications of putting money in to an Offset account? Can you please explain with an easy example?
Thanks for your presentation. well explained Info...
Thank you for sharing
Hi, Great Video, very helpful. Cheers mate!
Very well explained. Thank you
nice and clear explanation, but I am guessing to set one up you have to re-mortgage?
MeSalesMe - it'lll depends on your bank and wether the option exist to switch to a product with an offset feature. You'll need to talk to your bank or a local mortgage broker to help you answer your questions taking into account your complete financial position and circumstances.
Making fortnightly or weekly repayments more beneficial than making monthly repayments. But If you keep all your savings in an offset account, does it make any difference how often you make repayments ?
Hi Shavini. Thanks for your great question. It won't make as much of a difference if you already have an offset account. But if you make fortnightly repayments calculated as monthly repayments by two - you will effectively make an month of repayment every year. And that will make a difference as you are paying your principal back even faster. Combining both will be the best way. But keep in mind that by making fortnightly repayments (ie month / 2) each repayment is slighly more than fortnightly repayments calculated as year divided 26. But if you can afford it - it's wotrth it. Btw, i've got a video that goes into fortnightly repayments in more detail ruclips.net/video/kKyY3XFh7K8/видео.html.
Thanks a lot Daniel
If my fortnightly repayments DID total to the same annual amount as the monthly repayment schedule, and all my money is in an offset account, surely there is no saving here, yeah?
Is it better to tell your bank you are going to pay your principal off weekly, and up the value of payment, or keep the same minimum payments but load up your offset account.
Hi Robert. Regarding repatment payment first. What matters with weekly (or fortnightly) repayments is how the weekly repayment is calculated. Fore example, imagine your monthly repayment is $1,200. Now there are two ways your can/will calculate your weekly repayment: either (option A) by dividing the annual repayment by 52 or (option B) by dividing the monthly repayment by 4. If your bank uses option A - your weekly repayment would be $276.92 - i.e. ($1,200 x 12) / 52. Using option B - your weekly repayment would be $300 - i.e. $1,200 / 4. This matters - because in case of option A - you are not making any more repayment over a 12 months period (or $14,400 per year). You are still paying . However, with option B, you actually end up making an extra month of repayments every 12 months - i.e. $300 x 52 = $15,600 - which is $1,200 more than if using option A ($14,400).
Hope this make sense.
Now the reason it matters how weekly/fortnightly repayments are calculated - is that using one option - you are forced to make extra repayments. And extra repayments sit in your loan account reducing the balance banks use to calculate your daily interest cost. And the less interest cost you are being charged - more of your repayment (principal and interest) repayment is used to reduce your principal/limit).
This is a long winded way to say that whether you pay the extra by making weekly repaymen - or keep the money you would have used for xtra repayments - it doesn't matter - at least as far as reducing your interest cost. $100 extra in your loan or $100 in your offset account will have the same impact.
What you need to decide is what's important to you. If it's cashflow - then you may be better offer keeping your monthly repayment to the minimum. Or it may be to avoid the temptation to spend the money in the offset. You may like the idea of 'out of sight out of mind'. Or if you are in Australia and the property is currenly your home but are planning on renting it out at some stage in the near future - you may be better off keeping your redraw funds to the minimum - to maximise potenital taxation benefits when start renting it out (but that is a conversation for another time and with your accountant - which i'm not).
Hope that helps.
But great question btw. Thanks for asking.
All the best for 2024!
@@marketfirst1 yes that's the critical thing having the strength to not touch that redraw.
My minimum is $470 per week and dump rest in offset.
Have chosen to pay $1100 per week and have smaller offset.
I can see benefit in having big sum in offset, but if you don't have the discipline, it will be a temptation.
Really Helpful Mate !
Hi great video just purchased my first house with %100 offset and redraw im going to put an extra 7000 in my offset and further salary sacrifice a further $30 a week into my offset.
My question is I've always been told stay clear of credit cards as they are a trap I'm abit confused as why I would get a credit card knowing I'll be oweing a large amount in the future?
Thanks for your question. Credit cards can be a trap IF you can't control your spending and don't pay the balance IN FULL each month. That is why - when sitting with potential borrowers and discussing the option of a credit card - I always look into their spending habits as it'll give me a pretty good idea of whether a credit card is going to work for the. So in short - for the right people - a credit card will add another layer to your offset facility (as the money spent today only needs to be paid back later when the statement is due and until the money is paid it is sitting in your offset account). For the wrong people (ie who fail to pay the full balance each month) they'll end up paying a lot more than what they're saving with the offset - ie credit card interest in the twenty %. Be honest with yourself.... can you trust yourself with a credit card or not. And finally, if you're concerned about missing a payment - you always have the option and setting up automated payment of your credit balance each month. Hope that helps
Very nice explain Daniel. Many people always spending easily but very hard to pay back.
Thanks mate! Bloody good. Learned heaps.
You're very welcome. Let me know if you have any questions.
Very informative video! Are offset accounts available in the US? All my search results pull Australia, NZ, and U.K. websites
I operate in Australia - so I don't really know about the US. What I know is that before offset accounts were introduced - borrowers were using line of credit (LOC) type loans to the same effect. They would transact through the account (deposit savings, credit wages, pay credit cards, etc.) which is the same immediate effect on the loan balance as an offset account would do. LOCs are not so popular in Australia anymore (except for some specific needs) as the interest rate is usually a lot higher than on an offset account. Hope that helps.
Unfortunately not in the USA for tax reasons
So I’m the situation where you have loan for 300k and you have an offset account which you have 300k, when you pay your repayment there $0 interest so the repayment is going straight to principle? Am I right
Yes. The full repayment is going to principal
Thanks for sharing your knowledge!
very well explained. thanx
The credit card tip is very useful! thanks mate
you're welcome. used properly, a credit card can work for you!
Hello
I only have 5 years left on my mortgage is this still worth doing and what bank in the UK do offset accounts?.
Thanks
Hi mrburn68, first thing i'd do is ask my bank if i can make extra repayments. And if i can, how much it'd cost me to access these funds (in redraw) if I needed to. Also, I'd make sure (if I'm on a fixed rate loan) that I'm not make too much extra repayments. Ask your bank these questions. And if you satisfied, then you can start parking some of your extra cash and any extra repayments in your loan. This will reduce the amount of interest charged and, if you are making principal and interest, you will pay down your principal faster as less of your repayments is going towards paying interest. Hope that helps.
I just took a loan and Why Wells Fargo rejected to open an offset account for me?
If you put all your money into a100% offset account, is there any additional advantages in also reducing the loan term? I.e. do you pay less total amount at the end by reducing the loan term AND using an offset account or do you get the same benefits by only using the offset account? Thank you
Yes you would as the total interest cost as interest cost is calculated daily on the balance on that day. So the faster you pay your mortgage off the less total interest you pay. But remember, if you shorten your loan term, because you have less time to pay it off, your repayments will go up. That will impact your daily cashflow (I.e. more money needed to make the repayment).
But remember, the money in your offset will automatically reduce the time it takes to pay off the loan (because more of each repayment goes towards paying down the principle). To give you an idea, I structured my loan so that it’ll take me about half the time to pay off my loan. And only making the minimum repayments.
Let me know if that answers your question.
@@marketfirst1 Great video. What you mean is that the repayment amount (Say fortnightly) would remain the same no matter how many you have in the offset but the total time period would reduce??
Great video thank you
You stated that you have the same in your offset as what you owe on your loan.
Why not just pay off your loan since you already have the amount owing?
he might have used the equity and some of the money to buy another investment property.
Great video and very interesting concept.
But ,what about the opportunity cost that you "paying/lossing" for having all that money sitting up in the offset account? Won't it be better off by being in an investments option that is giving you a 6%p.a. for example?
Using your example: if you have a offset account of $300K (ie the value of you home loan) that mean that you are lossing the opportunity of having a ROI of $18,000 (300K x 6÷ = 18K) per year in an investment.
Can you help with scenario?
Thanks for your answer!
Hi David, apologies for late reply. You make a very good point. The answer is depend on the individual. It depends what you're trying to achieve and what type of return you're able to achieve. But you're right. Parking ALL your savings into an offset account is not always the best option (again depends on goals, circumstances and requirements). One of the advantages of having your funds in the offset account (besides saving interest) is the flexibility it provides. Personally, I park my cash in the offset accounts until I can invest it in a higher return vehicle. Hope that helps.
Daniel Eigenmann Thank you very much for replying. I really enjoyed your video. All the best
@@davidleal1266 Hi Daniel, in your scenario you should also consider tax implications on investing vs the offset as well as liquididity. Offset in Australia, reduces your interest payable on the home loan therefore is tax free. ROI on shares or other investments will likely incur tax. The other investment might be better but depends. E.g. $10k offset home loan at 4% p.a. offset vs investment at 5% p.a. the offset would be better if you had to pay 32.5% tax on the investment. Also the offset is liquid, e.g you can withdraw the cash if needed straight away and investment may not. Of course there are other examples where investments are better off, also the the offset return is stable an and investment could be more risky, could be higher or lower than 5%
which banks are prepared to offer this type of account?
sorry for late reply. which banks depends in which market/country you reside.
great tips- thanks Daniel ;-)
thanks . It is really helpful
Thanks for your presentation. Good info.
Thanks fragglepuppies. Glad you liked it. Let me know if there are any subjects or questions you want me to cover in a future video.
Can this work in United States of America
Audy cambron 🤷🏻♂️
Search “velocity banking”
Use HELOC in places of offset account
I earn a pendion of R9000 which i use for i use R5000 foe nonthly expense. My credit card debt is R9000 bank deducts minimum payment.
Should i transfer R9000 into credit account and use live off credit card to reduce interest and debt
Ellen - without a full understanding of your financial position and your goals and objectives - i can't give you advice. I recommend you speak to a local licensed adviser to answer your question.
Great video
Thanks Mike. Greatly appreciated. Let me know if you have any questions or if I can help you in any way.
Thanks bro.
I just wish that they taught this stuff in schools , that would've made easier for everyone to live a proper life .
I 100% agree, that is the foundation and basis of my entire channel. I have no idea why they don’t set us up with this knowledge from a young age. It would reshape so many people’s futures!
great vid
Thanks. My mortgage interest rate is 3.87% and i do get an offset account. I have some savings. Is it better to keep my savings in offset account or invest those savings into something that gives me 10-15% returns?
Hi Irid. Great question. Now, you can appreciate that without knowing your exact circumstances, i can only share with you what clients of mine are doing... They keep their savings in the offset account until they find a better use for that money. That way they make the most of their funds whilst looking/searching for opportunities with better returns. Not sure if you are in Australia, but in Australia the benefit of having savings in the offset account are (1) the money earns a higher return (as it earns the same rate as the home loan rate - which is well above the savings rate) and (2) the money earned (saved) in the offset account is not added to your income and thus doesn't get taxed. Hope that helps. Get in touch directly if you want to discuss your specific circumstances.
Thanks a lot that was quite helpful.
@@lriddh2407 My pleasure. Let me know how you go. And remember, until you find a better use for your savings, keep it in your offset account.
Great thanks again, Daniel. I will keep that in mind. 🙏
@@marketfirst1 r u a mortgage broker in Australia
What all these ‘Offset’ videos neglect to mention is that the Offset rate is always significantly higher than the fixed mortgage interest rates. One needs to have significant savings before it breaks even vs the fixed mortgage rate (Why oh why would banks give away money). At the time of writing this comment Westpac NZ has rates of 5.33% for Offset and 3.39%. Do the math on that. Not denying Offset can help save on interest cost but the benefits may not come as soon as one thinks depending on how much you have in those offset accounts.
Hey dcarter - good point - but it is not always the case - especially if you compare the rates for the same lender. But rates - is only one factor (not usually the first) to consider when choosing the right solution and structure. In my case - the rate has zero relevance - it could be 10% for all I care.
Why didn't you just paid off the loan?
Hi Natalia, the reason i haven't paid the loan off is that i the money is still available to me (if i need it) and in Australia there are (in some situations) a tax benefit in not paying the loan off if i was to turn my property into an investment (rental) property. You need to evaluate your own circumstances to work out the best use of your escess funds (whether they shoould be held in an offset - used to pay down loan - or invested to earn a higher return). It's up to you!
@@marketfirst1 Thanks for your reply. 🤗
Why go through all the hassle? If you have the money just pay off your mortgage.
When your ready to buy another investment, it's easier to pull out money from the offset then apply for a new loan.
For 10 fkn years I was paying interest only on my loan only to find out I’ve only payed 9k of the 150k loan !! Should of payed my unit years ago
if you have the same amount in the offset as your loan- why not pay the loan off? LOL
Good question crypto. Comes down to personal preferences. I like to have there, so that it is always available when I need the funds. Of course you can pay out your loan. You end up with more equity, which you can then monetize by applying for a new loan. As I said, up to you.
Personally I should have watched your video 12 years ago, I never used my offset account wisely, I am even scared of using my credit card, my home loan bank and the wages getting bank are different, so which misleading me forget to pay my mortgage on time! So definitely I am going to change my situation! And thank you very much again!👍👍👍🙏🌹