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Banks used to penalise financial advisers for giving good client advice by reducing commission payments. They didn’t want me telling you how to pay less interest on your mortgage, as that’s how they made money. The good news is that times are changing.
Offset accounts offered by some of the major banks now present an easy way for clients to minimise interest costs whilst keeping their bank accounts and money management simple. You still have to be careful of their benefit being over exaggerated but they do work and I use them for most of my own clients.
Here’s a simple run down of how they work. Any offset account linked to your mortgage account will reduce the sum of money that bank interest is charged on. For example, if you have $400,000 as a mortgage and $50,000 saved for emergency expenses, you would now only pay interest on $350,000. This happens each and every day so even your weekly salary payment goes into an offset account and reduces the interest you pay. You can have 10 or more of these accounts if you really wanted to and direct family members can also use their saving to help others in the family – a parent helping their child perhaps.
Now you could have that same money in an interest bearing account or term deposit but the effect would be very different. For starters, a bank right now might charge 5.9 percent floating rate on a mortgage but only offers 3 percent on their term deposits. There is a difference of 2.9 percent right there but it doesn’t stop there. When you earn interest you need to pay some to your friends at the IRD. For simplicity, let’s say your average tax rate is 20 percent so your 3 percent term deposit earning now reduces to 2.4 percent. Now the difference between the offset saving and interest earned is 3.5 percent in favour of the offset accounts. That’s big and you don’t have to pay the IRD for interest cost reductions, so the whole 5.9 percent saving is yours to keep.
It may not surprise you to know that there are also a few other ways of squeezing some extra savings out of it but at 3.5 percent extra we’re off to a great start and making much faster progress on that mortgage. A typical household in the Hibiscus Coast can expect to save more than $100,000 on a 25–30 year mortgage with average incomes and a little bit of self-discipline.
The opinions and information expressed above are not a financial recommendation. Contact a financial adviser for written recommendations that are suited to your personal situation.
