Yahoo Finance The biggest mistake you can make when paying off your home loan
This video is part of an exclusive 10-part series from the book: How to get mortgage-free like me, available at www.nicolessmartmoney.com.au
Paying off your home loan seems relatively straightforward: you transfer extra money into your home loan account, right?
Wrong.
In fact, paying off your home loan in that way is the biggest mistake homeowners can possibly make, money expert Nicole Pedersen-McKinnon revealed.
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“When you pay off a home directly into its mortgage, as most people mistakenly think is best, you commit to either living in it forever, or selling it,” she said.
“If life takes you elsewhere, or you want to upsize or downsize, it will be no good to you as an investment property.”
Instead, homeowners should pay off their mortgage into an offset account, in order to retain full flexibility.
What’s an offset account?
An offset account is a transaction account linked to your home loan, and homeowners can make deposits or withdraw from it as they would with any transaction account.
While on the surface, these accounts seem like regular bank accounts, any money that is held in them instead reduces the amount of interest charged on their home loans.
For example, if a homeowner has a $100,000 loan, but $10,000 in their offset account, they will only pay interest on $90,000.
“It’s where you should house every single dollar that passes through your hands,” Pedersen-McKinnon said.
“If you’re saving for a holiday - it should go into an offset account. If you’re saving for a wedding, school fees, a car - it should go into an offset account. If you have a Holy Sh*it fund it should go in an offset account. Your salary should go into an offset account.
“You may be able to have up to 10 offset accounts that are clearly named.”
The offset-on-steroids strategy
While an offset account will help you save on interest, Pedersen-McKinnon has devised an ‘offset-on-steroids’ strategy to take it one step further.
Her strategy will see you leaving the offset account untouched, and living for the month on free money - a credit card with a long-interest free period.
“If you shift your salary out of the offset and onto the [credit] card at the last possible interest-free minute, you’ve used the bank’s funds to save you money and time.”
Homeowners with the average $400,000 loan at a 5 per cent interest rate, that are able to sit savings of $30,000 in an offset account at all times, could save almost $66,000 and nearly 2.5 years on a 25-year home loan.
And if you are also able to flush $10,000 through your credit card each month, which would mean leaving that amount in your offset account until the last possible minute as well, your interest savings could reach $85,000.
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