Guest Post by Jelena Djurdjevic
Trying to find the right place to live, making sure the property isn’t going to end up costing you a fortune in repairs you didn’t know it needed and actually getting together the money you need to buy it in the first place.
While my husband and I are still trying to get on the property ladder, we’re already thinking ahead and doing our research to find out what kind of deals we could get that would help ease the financial burden.
We’ve even spoken to a financial advisor to figure out what we could realistically afford and when.
It’s not an easy process, and there’s a lot to get your head around, but what’s concerning is that the worry doesn’t stop once you’ve purchased your dream home.
In fact, mortgage stress is surprisingly common, with 29% of Australian households experiencing it.
What’s worse, mortgage stress is set to increase this year, along with defaults.
While there are plenty of ways you can minimise the risk of both, such as by sticking to your budget and only getting a place you can truly afford, taking potential interest rate hikes into consideration, and shopping around for the best loan, we’ve been quite interested to learn about the option of having an offset account.
Not heard of it before?
Don’t worry; neither had we.
The basic idea is that you keep your cash in an offset account, rather than a savings account, thereby reducing the total amount you pay on interest each month.
Say you owe $450,000 on your home loan and put $50,000 in an offset account, then you will only be charged interest on the $400,000 by your lender.
So, you can save money on interest, without actually having to pay money into the loan itself.
What you do instead is put that cash into what’s essentially a transaction account that is connected directly to your home loan.
While this may mean that you lose out on the interest you would get from a savings account, it’s still usually a better deal since you’re likely saving more on your home loanand, you don’t have to worry about paying tax on the interest you earn.
What we love about this is that it’s something that could end up saving us thousands in the long run but doesn’t really require much effort on our part.
Plus, it could allow us to pay down our loan faster, while still allowing us access to the savings we have built up in the offset facility.
Yes, you still have access to the money; it’s pretty much a win-win.
It’s ideal if you’re a disciplined saver, which I’m glad to say we both are. However, even if you’re a spender, it could still be a good idea.
If you get your salary to go straight into that account, then the money will immediately impact how much interest you pay, as it’s calculated daily.
Help with Investor Purchase
But what if you’re ahead of us and already own a home, but are looking to upgrade? Or what if you’re a property investor?
Well, there are further advantages of using an offset account
For instance, say you’ve outgrown your current home and want to upgrade to more of a ‘family home,’ while keeping the first property as an investment.
Well, in that case, it could be even more beneficial.
While you may not currently be able to get a tax deduction for interest payment on money borrowed against your existing residence to purchase a new property, you can claim a tax deduction for all interest payments on existing debt on the investment property.
If you take money out of the offset account to help pay for your upgrade, then this will increase the interest payable on your original mortgage.
Since the loan was taken out to acquire a home used strictly for investment purposes, all of this interest cost will be tax deductible.
Lesson learned? . . . . When it comes to money matters, do your homework.
You never know where you could end up saving a ton of money and generally make life a whole lot easier for yourself.