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Chip away at the mortgage using an offset facility
It appears there’s been a bounce in the real estate market following the release of the Australian Bureau of Statistics (ABS) numbers that revealed home loan approvals were up in October.
While it’s not quite time to pop the champagne corks – approvals grew at a miserly 0.1 percent from September, some experts such as Raine & Horne chief executive Angus Raine, have attributed the spike in home loan approvals to improved consumer confidence on the back of lower interest rates, a chronic shortage of new homes, and increased net population growth.
Yet Mr Raine suggests that homeowners should not simply sit back and think that lower interest rates are the only solution for slashing mortgage debt.
“One strategy that can help homeowners reduce a home loan faster is a ‘100 per cent mortgage offset account,” said Raine.
Put simply, a 100 per cent mortgage offset is a savings account linked to a home loan and is a tax-friendly way of putting savings to work by reducing interest liabilities
By way of explanation, let’s assume a homeowner has a mortgage of $300,000 and savings of $40,000.
With a mortgage offset account, a homeowner, in this instance, will only pay interest against a balance of $260,000.
“An offset is a great way to swing the mortgage pendulum in your favour rather than your lender,” said Paul Clitheroe, chairman of the Australian Government Financial Literary Board.
In addition, an offset facility also has some significant tax benefits.
“As far as the Australian Tax Office is concerned you have not received interest on the [cash] deposit, so it is not included in your taxable income,” said Clitheroe. “This means you are getting the full benefit of the return on your deposit without losing up to half in tax, and it certainly helps to pay the mortgage off sooner.”
Despite the benefits, Clitheroe warns that a mortgage offset facility is not for everybody and instead, suggests borrowers with a small amount of savings may be better off applying for a no-frills loan at a lower interest rate.
“You really need to do your sums to make sure that potentially paying a little bit more for a loan with an offset facility is worth your while,” said Clitheroe.
If you are considering a home loan with mortgage offset facility, shop around using a comparison website such as RateCity.com.au.
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Disclaimer
This article is over two years old, last updated on December 19, 2012. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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