Podcast episode (Small Change) featuring Rachel Corbett and Jane Slack Smith discussing how Australian mortgage borrowers can reduce interest costs using offset accounts. The episode explains what an offset account is, how daily interest calculations work against offsets, strategies like sweeping funds monthly, splitting loans into multiple parts each with offsets, and notes about interest-only loans and lender-specific behaviours.
Hey there.
I'm Rachel Corbett and this is Small Change, the podcast that's all about the small changes you can make that'll make a big difference to your finances. Have you got a mortgage? Well, Jane Slack Smith, director of Investors Choice Mortgages and founder of your Property Success online education, is here to tell you about the secret weapon that can help you get ahead faster. And remember that if you want to make some changes that are going to help you set up your personal finances, make sure you seek professional advice, because the tips in these general. And that is a disclaimer. But now it's time for Jane.
Australia truly is the lucky country. Over 70% of Australians own their own home, or at least are paying off their own home. However, we are also lucky when it comes to one of the biggest secret weapons that we have that is not available anywhere else in the world. And here's a hint, it's linked to that home loan. And as boring as it might seem, it's something that is not well known, or, if known, not well used. And that is the humble and unassuming offset account in itself. This simple savings account can sit in your arsenal without ever knowing how really powerful it can be for those with a home loan. Often the first question I get asked as a mortgage broker is, what's your cheapest rate? Now, I can tell you there are so many lenders available for you to choose from, and there are more and more being added every day, but most of these will tell you that they don't have the fancy features that you don't really need to pay for, and hence that's why they can get you such a cheap rate. But I'm telling you that there is a reason that over 70% of all the mortgages in Australia are written by the 16,000 mortgage brokers available to you to help you, and that's because they understand it's not all about the rate. And it's also about the features that you can utilise that will, in the long run, make that cheap rate look expensive. And one of those features is the humble offset account. Now, the unassuming offset account is essentially a savings account, just like any other savings account you have. Where it comes into its superpower is when it's linked to your mortgage, your loan, it's now called an offset account. Essentially, what happens is every day the bank's supercomputers look at your loan limit and let's just say it's $500,000, and then they look at the limit in your savings account and that's your offset account now. And they calculate the benefit of you having those funds in that offset account every single day. So they calculate daily your benefit and then they accrue that up and charge you monthly or fortnightly. You need to know the lenders and you need to know their quirks. And some lenders will use that benefit, that accrued amount in calculating, maybe taking some time off your mortgage. So what you will see is that your mortgage repayment will stay the same, but your term of the loan will not be 30 years. It will be 26 years and two months. And some lenders reduce your monthly repayment. And if you have an interest only loan, that is a loan where you delay paying off the principal for say five to 10 years and just pay the interest for the first five to 10 years, then that interest only loan can have an even bigger impact on your cash flow. But be warned, interest only loans come with pros and cons. So make sure that you talk to your mortgage broker or your trusted financial professional before undertaking one. So let's just talk about that interest only loan. If you have a 500,000 limit as your loan and you have $50,000 in your offset account, then the bank calculates your charge of the interest. They look at the difference, 500,000 minus 50,000, 450,000, and then they charge the interest on the 450,000. Now, if your interest rate is say 2.5% per annum, then that means that you are paying $100 less a month. That's $100 in your pocket. And the following month the bank starts calculating again. So your offset account now is $50,100. As you can see, it starts adding up and adding up. But how about supercharging that? How about supercharging it so that you're actually using that saving account every single day to be maximized, which means you're not dipping into it. So you might put everything on your credit card. And on the last day of the month, just before they do that calculation for the last time, you sweep your credit card so you've got the maximum amount of money in your savings account every single month. That's when your offset account really works in your favour. Well, what if you take your home loan and you split it up? This is something that I did. I took a $250,000 loan and I split it up into five $50,000 loans. Each loan had an offset account against it. And I doubled down on filling up one of those offset accounts. And after a few years that offset account was full, which meant I didn't actually have to pay any interest at all on that loan. Now, take note, this filling up of the offset account is not putting the money in the redraw and it's not paying off the loan. Essentially, the loan still stands there at $50,000. It just means that you have $50,000 in that savings account that's offsetting that loan. Well, once I started paying off that first $50,000 loan and essentially having that offset account filled up, then I got to work on the next one and started filling that. And that happened even quicker because I now had more money and my cash flow to put into that offset account. This offset account is truly one of the supercharged super weapons that you have for your home loan. Australia is really a lucky country and we should be thankful for the humble offset account because it can really help us get ahead faster.
So get that money in your offset account and trick that bank into thinking you owe less. So sneaky. If you've got a question for any of our experts or you'd like to share how these small changes are impacting your finances, make sure you drop us an email@smallchangeovapodcast.com thanks so much for joining us and I'll catch you on Friday for another episode.
