As the first month of the new year is already coming to a close, many of us must have clocked our financial goals for the year. However, how many of us have actually paused and analysed our home loan?
Buy why should I analyse my home loan, you’d ask.
Agreed you might be having the best deal under your belt, however, planning your repayments smartly can help you gain financial freedom faster. It can also mean you pay much lesser interest over the life of your loan!
Repaying your way to financial freedom:
Paying off your home loan before the full term is easier than you imagined. We all know that debt accumulates interest and if you can pay off the principal faster, you end up paying lesser interest as well as take away years from the life of your loan.
Most banks allow you to make additional repayments at no extra cost. And you don’t have to wait for a lump sum to make an additional repayment, simply making your repayments fortnightly instead of monthly would lead to 13 full repayments in a year instead of 12!
Our repayment calculator is a simple tool that makes your home loan decisions simpler. You can calculate your repayment amount by simply putting in the desired loan amount, term of the loan and the interest rate – couldn’t get simpler, isn’t it?
What’s more – explore the magic of additional repayments by using our additional repayment calculator to see how each extra repayment kills the interest and years from your loan. Reduce your debt faster for peanuts by going through these simple tips.
But what if I need the extra money?
A very valid concern that pushes you to keep your money in a savings account – for liquidity and lesser interest. You needn’t worry though; most lenders allow borrowers to redraw the additional repayments or have an offset account linked to the loan, offering the freedom to withdraw the additional money as and when required.
Both redraw facility and offset account help you pay your loan faster. Here’s how they are different:
A redraw facility allows a borrower to redraw the additional repayments made against the home loan.
Christy’s monthly repayment amount is $800. She pays $100 additionally against her home loan every month. In a year, she accumulates an excess of $1200, which is her emergency fund. Further she has calculated using our repayment calculator that if she continues to make an extra payment of $100 each month, she will save $29,917 and 2 years 6 months on her $300,00 loan at a rate of 5.5% for 25 years.
Note that different banks offer differently. Many lenders offer redraw facility for free or may charge up to $50 per redraw. There could also be a limit on the number of free redraws and the amount you can redraw in a year. Compare online to get the best deals possible.
An offset account is a savings account linked to your home loan. Any amount you keep in this account is offset against your loan amount, reducing the interest paid on a daily basis. Thus, the more the amount of money in your offset account, the lesser interest you pay overall.
Christy’s friend Xach opened an offset account linked to his home loan. He received $10,000 from his parents as gift and deposited the amount in his offset account. If Xach doesn’t withdraw this amount, he will save $27,634 and 1 year 3 months on his $300,000 loan at a rate of 5.5% for 25 years.
The key to fully utilizing this feature is by keeping a good amount of money in the account. For example, consider moving all your savings to your offset account or ask for your salary to be directly paid into your offset account. This way, you can maintain a high balance for the maximum number of days.
What should I choose – Offset Account or Redraw Facility?
Though the function of both is exactly the same, the choice eventually depends on your financial condition and goals.
An offset account is suitable if you have a stable income and can maintain a substantial balance in the account. Having few dollars in your offset account is not going to reap much benefit.
On the other hand, if you think you have extra money now and would rather build up a fund for the future, a redraw facility could be more suitable for you.
Don’t forget to consider the purpose of your savings though. Using the amount redrawn from an investment loan for non-investment (or personal) purposes means the interest on that amount is no longer tax deductible. You can use the money withdrawn from an investment loan offset account for non-investment purposes without losing the tax benefit; but we recommend you consult an expert before taking the call.
HashChing aims to simplify your home loans by guiding you along the way and offering you the best deals in the market. Contact our mortgage brokers to address your queries free of cost.
– Vidhu Bajaj