When it comes to managing your mortgage, you've likely heard of revolving credits and offset loans. Maybe your sister, colleague or parent has recommended it as a great mortgage structure.
But do you truly grasp the differences between these options and which one aligns best with your financial goals?
Let's delve into the world of mortgage finance and explore how these two approaches can help you save on interest in different ways, and make the most of positive money habits.
Revolving Credits: Maximizing Flexibility
Think of a revolving credit loan as an oversized overdraft facility.
It brings all your financial transactions into a single account, where your income flows in and your bills and loan repayments are debited. It even comes with a handy debit card for everyday use.
The magic happens in the daily interest calculations, where the balance of your account plays a pivotal role. The more funds you keep in the account, the lower your interest payments become.
Additionally, you have the flexibility to make lump-sum repayments and redraw money up to the loan amount limit.
It's a facility that is "interest only" which means you don't make principal repayments on the balance, or in other words, you don't pay it off over time.
Advantages
Some lenders offer monthly credit limit reductions, helping you pay off your loan within a set timeframe - this is generally in line with normal principal payments
Other than paying interest, no fixed repayments are required, making it ideal for those with fluctuating incomes.
Combining your savings with this account, rather than keeping them in a separate savings account, leads to substantial interest savings and exempts you from savings account interest tax.
If you exercise discipline, you can accelerate your mortgage payoff and pay less interest
Disadvantages
All your funds coalesce into a single account, making it challenging to differentiate between funds earmarked for various purposes.
Large revolving credit loans may leave insufficient funds available for offsetting, resulting in higher interest payments due to the elevated floating interest rates.
Offset Loans: Optimizing Savings
With an offset loan, your lender takes into account any savings or funds you hold in other accounts and deducts this amount from your total loan before calculating interest.
For instance, if you have a $500,000 home loan and $25,000 stashed in your savings account, your interest is calculated based on the reduced amount of $475,000.
Interest accrues daily, meaning that larger account balances translate to lower interest payments, all while maintaining a floating (variable) interest rate.
Unlike revolving credits, offset loans allow you to spread the funds you're "offsetting" across multiple bank accounts, effectively segregating them for different purposes.
Advantages
Reduced interest payments enable faster loan repayment.
You can often link various accounts, such as those of partners or parents, to maximize interest savings.
Maintaining separate accounts simplifies fund tracking for distinct financial objectives.
Disadvantages
Oversized offset loans might not provide sufficient funds for offsetting, resulting in higher interest payments due to elevated floating interest rates.
Choosing the right option
Generally a revolving credit suits people who are meticulous with their finances and comfortable with mingling their funds in a single account.
The biggest risk with a revolving credit is that if you lose track of what you're spending, the value of having the facility evaporates.
An offset account is better for those who would like to manage finances in distinct accounts, save for different purposes, or who would prefer not to put all their "eggs in one basket"!
Most importantly, it's key to get the right fit for you and your situation, so book a call with one of our advisers who can talk you through the best options.