Jane wants clarity on how to use her offset account

Dear Ritzy,

I try to keep my money in the offset for as long as possible, rather than paying off my home loan more frequently.  Am I paying more or less interest by doing this?

Thank you,

Jane

 

Hi Jane,

Thanks for your question.  A great follow-up!  

Just quickly, interest is the cost of borrowing. It's represented as a % and the amount you pay every year = amount you borrow x % interest rate.

From an interest payment standpoint, putting money into the offset account vs. the same amount into your home loan  will equal the same amount in interest charges ... you'll net net be the no better or worse off. It just depends on how you use your offset account.

What will make a difference to your interest payments is if you pay more often, (and more if possible!). Again the magic of compounding.

So for example, using this tool: https://www.mortgagechoice.com.au/home-loan-calculators/how-long-to-repay/

If you have a $500,000 home loan, with 5% interest rate
(a) you make monthly repayments of $4,000 - it will take you 14 years and 9 months to pay off the loan with $207.75k in interest payments (you'll pay $707.75k for a $500k loan!)
(b) you make fortnightly repayments of $2,000 - it will take you 13 years and 2 months to pay off the loan, with $182.28k in interest payments
(c) you make weekly repayments of $1,000  - it will take you 13 years and 2 months to pay off the loan with $181.95k in interest payments

So you could save $25.8k and 17 months just by switching from monthly to weekly repayments!!!

This is compound interest ...!!!

Hope this helps.

Thanks,
Ritzy.