Tuesday, March 07, 2017

Mortgage Offset Account can add 10s of thousands of dollars of interest to a home loan.

Recently I wrote a Facebook post letting my family and friends know about the Mortgage Repayment Calculator. One person made a comment on having a mortgage offset account. The first tip on the Mortgage Repayment Calculator is about a mortgage offset account. I have to say I've always been a fan of a mortgage offset account to help reduce the amount of interest paid. However, I now realise my knowledge is dated.

When I had a home loan the mortgage offset account was a new feature and from my recollection was simply part of the loan. There was no additional cost. I now notice loans are offered in a range of packages with different interest rates. The mortgage offset account isn't offered on the base rate, but on a higher rate package. The higher rate package has an interest rate of 0.5% or more, greater than the base rate.

I plugged the $600,000 loan, 30 year, 5% interest rate figures into the Mortgage Repayment Calculator which results in total interest of $559,534.71. If I add 0.5% for an interest rate of 5.5% the total interest becomes $626,424.24. That's a considerable additional interest cost of $66,889.53.

If I check the base rate loans from a couple of banks the redraw facility is free on the base rate meaning you still have access to extra money paid into your loan should it be needed.

For those looking at a home loan, it is important to determine the costs of features you may or may not use. An informed decision is often a better decision.

Kelvin Eldridge

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