The goal of paying off your home loan fast is one that appeals to many homeowners. Paying more than the minimum repayments is the best way to achieve that goal but does paying off your mortgage make more financial sense than putting the money in a high-interest savings account?
Financial adviser Greg Pride, of Centric Wealth Management, argues it comes down to each person’s individual goals. “Both approaches have merit,” he says. “It comes down to whether you’re the kind of person who would like to retire early or have a holiday every year.”
Calculated entirely on financial terms, overpaying your mortgage will give you a better return. RateCity shows the average standard variable interest rate (at the time of writing) on home loans is around 6.4 percent (but rates start below 5 percent), while high-interest savings accounts offer up to 5 percent interest– so you are paying more in interest on your mortgage than you are earning on your savings.
If your goal is to pay off your mortgage as fast as possible, “clearly you go for the one that will give you a better return – and that’s the mortgage,” says Pride.
However, funneling any extra money into the mortgage denies you flexibility. Having money in a savings account allows you the option of drawing on it to pay for an overseas holiday, a new car or a one-off indulgence.
A better option, Pride advises, would be a mortgage offset account – a savings account that is linked to your mortgage. The balance in the savings account is offset against the loan, therefore allowing you to reduce the loan principle faster.
“A mortgage offset account offers the twin benefits of flexibility and paying off a reasonable chunk of your mortgage faster and with no tax consequences,” Pride says.
Interest earned on a high-interest or regular savings account is subject to tax, whereas you don’t pay tax on money in an offset account. “If your mortgage isn’t linked to an offset account, I’d be looking into it,” Pride says.
As always, it is important to do your homework and compare mortgages looking for ones with offset accounts. For example, some offset accounts charge an account-keeping fee that may reduce the return you receive.
Pride says a rule of thumb is to pay no more than one third of your after-tax income into your mortgage. “That way you can still enjoy life and have enough money to deal with any unexpected expenses.”