Doing Your Research Will Save Money – C. Thomas For those looking for a tax effective way to get the most from their money, an offset account is appealing. Higher interest rates and fees can affect this.
Savings interest accounts when compared with offset accounts prove to not be as beneficial financially. However, for the person looking to change their variable home loan account to an offset with the view to save on interest, figures should be looked at carefully.
If looking to change your home loan account, it is worth finding out what sort of costs will be incurred to do so. This includes considering any:
A one time only cost to you may be the fee for adjusting the loan. This may be somewhere around $300 – $400 dollars in Australia. It is worth checking this with your banking institution. In the grand scheme of things, this fee will be considered worth it by many, if it means greater savings over the length of a 15, 25 or 30 year loan.
An ongoing cost that can more greatly affect the worth of changing accounts is the interest rate on offer for having an offset account. This may prove to be higher than the rate you originally had on your home loan. For example, your home loan variable rate is 7%, whilst the rate on offer to change to an offset account is 7.7%. When considering the large figure that home loan amounts tend to be, this may prove to be less beneficial financially, despite having savings in an offset account.
Consider a home loan of $250,000. At 7% interest, this home loan is incurring $17,500 interest on an annual basis. If divided by 365, this amount comes to $47.95 on a daily basis. You have $20,000 sitting in savings that you feel would be better to put into an offset account, bringing your home loan down to $230,000.
The increased variable rate incurred for changing to an offset is 7.7%. Your $230,000 is now being charged interest at a rate of 0.7% higher than your $250,000 was. This incurs an annual interest amount of $17,710 or $48.52 daily. This is higher than the original $250,000! In this instance, your hard earned savings are probably better off sitting in a savings account earning 5% interest and your home loan being kept at the original 7% without an offset account.
For the offset account to be worth setting up at the higher interest rate, the annual interest rate currently incurred on your home loan can be used to determine what needs to be sitting in the offset account. This is worked out by multiplying the loan amount by 7%. This amount of $17,500 should then be divided by the higher interest rate that the offset account will incur.
In this case, divide $17,500 by 0.077 or 7.7%. This amount totals $227,272.73. Once your offset account savings can bring your home loan down to $227,272 or below, the value of having an offset will be worth your while financially.
This would require having a minimum of $22,727.27 sitting in the offset account (accumulated in savings). Until your savings amount is able to counteract the higher interest rate incurred, these funds will be better off sitting in a savings account.