It’s all too easy to get your loan set up, move into (or tenant) your property and get on with life, thinking that everything will just take care of itself; the loan will do what it does and you need not worry about it.
Which is Better?
There is actually nothing wrong with that mindset, do you want to be constantly stressing about your loan and how it affects your household cash flow? You probably have better things to do. That’s why it’s important to get the initial set up right, and rely on us to check in with you periodically to make sure everything is happy days.
The key: the set up.
It’s not all a one-stop shop in the loan product world. Every lender has different options and policies, and every household has different needs and therefore requirements. So here is an interesting question a client recently asked us: “should I have an offset account or just make more frequent repayments on my loan?”
Less money for ol’ banksy, and more money for you.
It makes a lot of sense to park as much money as you have at your disposal, into an offset account and let the balance of that account reduce the daily interest on your loan. This means you only pay interest on the total loan balance minus what is sitting in the offset. Smart. It looks a little like this:
Your home loan balance is $500K, at 4%,($2,387.08 per month. But you have, through sheer diligence, smart money management and maybe a few healthy tax returns, banked up $50k. Holding that cashola in an offset account linked to your mortgage will save you about 3 and a half year off your loan, as well as approximately $100K in interest (over the 30 year term).
Less money for ol’ banksy, and more money for you. Some lenders even have the option of multiple offsets which gives you a large degree of flexibility over how you manage your cash flow, whilst still having every single dollar offsetting.
PAYING MORE FREQUENTLY
Let’s look at paying more frequently. Same loan details as above, no offset:
Paying weekly will look like repayments of $596.77. This will save you $56,692 in interest and 4 years, 2 months off the loan.
Paying fortnightly you are looking at repayments of $1,193.54. This saves you $56,383 in interest and 4 years, and 1 month off the loan.
There isn’t a great deal of difference between paying weekly versus fortnightly, but there is a massive difference between that and a monthly repayment. Here’s why: The interest on your loan is calculated daily, based on your interest rate and the amount you owe at the close of business. It is charged to the loan once a month. So, in a 31 day month, you pay your weekly loan payment at day 7, thus reducing your loan balance. For the next 7 days, your interest is less again, etc etc.
On paper you can see that by parking that $50K in an offset, you save a lot more on the interest. You can also see that the making more frequently repayments will pay off the loan sooner than the offset option.
Does that make one better than the other? Well, that answer really depends on what you want to do with your money and your personal circumstances. Some lenders will charge a fee for that offset account (some, not all). And you obviously need to have that lump sum available in the first place. It all comes down to you own personal circumstances and what structure you are comfortable with.
Which is exactly why you should speak to us first.
Disclaimer: The information provided by the calculator is intended to provide illustrative examples based on stated assumptions and your inputs. Calculations are meant as estimates only and it is advised that you consult with a Diverse Lending Solutions about your specific circumstances. This is not an indication of your ability to qualify for a loan, nor is it an offer for a loan.