Clara and I recently celebrated our one-year anniversary in our apartment together, and have since been asked by family and friends about what the process entails in Australia. I don’t want to get into specifics because, again, I’m not a financial advisor, and this is not financial advice. But I thought I could share some high-level stuff that was useful for us.
The advice we received, for our circumstances, was to get an offset account. Offset accounts are associated with your mortgage, and serve to offset the amount of interest you pay. If you have a $500,000 mortgage (one could only wish), and your offset account had $100,000, the bank will only charge you interest on $400,000. When you remember that interest compounds, that delta in payable interest can be giga…
Clara and I recently celebrated our one-year anniversary in our apartment together, and have since been asked by family and friends about what the process entails in Australia. I don’t want to get into specifics because, again, I’m not a financial advisor, and this is not financial advice. But I thought I could share some high-level stuff that was useful for us.
The advice we received, for our circumstances, was to get an offset account. Offset accounts are associated with your mortgage, and serve to offset the amount of interest you pay. If you have a $500,000 mortgage (one could only wish), and your offset account had $100,000, the bank will only charge you interest on $400,000. When you remember that interest compounds, that delta in payable interest can be gigantic.
Having an offset is similar to paying additional money towards your mortgage each month, but that extra money remains liquid. This can be a big deal:
By offsetting our interest, more of our mortgage payments go towards the principle, which in turn also lowers our interest. Our bank includes how much interest we’ve offset each month in our statements, and it’s eye opening.
I’m a fan of things being automatic, whether it be backups or payments. We get our pay cheques deposited into our offset each month, which automatically goes to work lowering our interest without your involvement.
Unlike a “redraw” facility (which banks really want you to have instead), the money in an offset acts more like a savings account for life emergencies. This was very important to me specifically.
Our mortgage interest rates was higher than any high-interest savings account or term deposit we had, so it made sense (for us) to have savings work towards paying that mortgage down.
We’re regular savers, so the hope is the offset account will eventually be of a sufficient balance that our interest rate becomes zero. At that point, we’ll only be paying off the principle each month.
Offset accounts do come with their own concerns though:
They (usually) attract higher interest rates and fees, because the bank knows that the magic of compound interest won’t be working as much in their favour in this arrangement. If you offset though, you (should) be paying less overall interest, so the arrangement makes sense.
Offsets only work if you’re a regular saver committed to increasing your offset account. An offset with no money means you’re paying the full interest rate, which as mentioned above, is (usually) higher.
Banks really want you to get mortgages with redraw facilities instead, presumably because they’re more likely to make more money from you. Our bank accepted our application for an offset mortgage, but we had to hear their spiel about how great redraw accounts were first.
Anecdotally, this has already saved Clara and I more interest than I would have thought possible even a few years ago. We could be on track to have paid this all off in less than half the time, which is bananas to me.
I’m sure none of this comes as news to most people who are either looking for a place, or have a mortgage already. And again, I’m not a financial advisor. You must offset this unqualified advice by speaking to someone who knows your financial situation, what’s available, and what makes the most sense for you.