If you’re using a home loan offset account, you’ll be aware that surplus cash deposited into it reduces interest payable by ‘offsetting’ your loan balance. So what happens when your home loan is fully offset?
Should you transfer the money from your offset account to close the loan structure or should you keep it?
An offset account is basically a savings account. However, as it’s linked to a home loan it has dual purposes of holding savings AND reducing the home loan balance which reduces the interest payable on the loan.
Importantly, the offset account is linked to, rather than forming part of your home loan account. As a separate account, money can be withdrawn at any time, and let’s face it, over the 25 to 30-year commitment of a home loan, there’s every chance funds will be needed for renovating, buying a new car, making contributions to superannuation, or investing.
Withdrawing funds from an offset account can make it possible to take advantage of those types of opportunities without increasing your private home loan debt.
At some point, your offset account will become equal to or greater than your home loan account, making the interest payable nothing, while continuing to provide access to funds if required.
For those who are impatient to be done with their home loan, paying it out using the offset account savings and asking the bank to release their mortgage may be a preferred option.
However, with all their savings used to pay the debt, what would happen if they needed money for something else?
It always depends on the individual, but it can be beneficial to keep a home loan and offset account open once it’s fully offset, with the most obvious benefit being access to funds.
If there’s ever a need for immediate or emergency access to funds in the future, the offset account and loan structure will already be in place, with no need to apply for a new loan or have the expense of application and loan establishment fees.
The other important consideration when reapplying for a loan is there’s no guarantee the application will be successful.
Debt management is a pillar of financial planning and access to funds is often the key to making the most of financial opportunities and providing a conservative but often prudent ability to have access to cash.
As explained here, accumulating offset account savings can accelerate home loan repayment, however the saving aspect can provide its own opportunities.
Putting offset savings to good use might include purchasing assets such as a rental property or shares to create income streams that could contribute positively to private wealth.
As the offset account money is linked to, but separate from a private home loan account, there can be worthwhile tax advantages as well. We’ve written about using an offset structure to purchase assets previously, but rather than add to the length of this article, you can read here.
While there are long term financial planning advantages to keeping an offset loan structure alive, it’s not for everyone.
Some people need completion which can provide a sense of achievement and often, considerable relief.
However, effective debt management is an integral part of financial planning and decision making requires finding out what’s right for you long term and that includes seeking advice BEFORE closing your offset home loan structure.
To learn more about the benefits of an offset home loan structure as part of proactive financial planning, please contact James Marshall on +61 (0) 7 3007 2080 or email
contact@executivestrategies.com.au
To learn more about James, visit this link.
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.
