Wealth Building With Home Ownership
Property is a familiar investment. Most high income professionals are home owners and know a thing or two when it comes to comparing property values in a particular suburb, negotiating loans and dealing with real estate agents.
For many Australians, the "forced savings" of paying down the mortgage on their own home is a major wealth building strategy.
When the loan has reached zero and you hold the family home outright, you are unburdened from one of your major expenses. Rent, however, is always due the next month!
Other home ownership advantages include:
- The family home, including improvements, is usually free of capital gains tax. Improvements to the home are also CGT-free, so if a $100,000 improvement creates $150,000 of value, that extra $50,000 is tax free.
- For older generations, the home is outside the assets and income test for the age pension.
- Reverse mortgages turn homes into tax-free reservoirs of wealth. Individuals can smooth consumption over their expected lifespan by building up the reservoir during their working years and running it down in retirement.
Building wealth in the home
Wealth building via accelerated home loan repayments
Our savvy clients have an endgame in sight before they even apply for a home loan, and with the right mortgage offset account, they could win that game even more quickly.
The future matters. The years roll around and it’s always better to pay off a mortgage before its term and pay less interest to the bank. Better off in your pocket - for your family - than in the banks profit line.
The good news is that if a mortgage offset account is right for you, it can help you squash those debts faster, building wealth.
Buy Or Rent?
Home ownership is able to be contrasted with the strategy of renting instead, and investing the difference in long term investments. This is a valid strategy, and warrants further reading - which you can access here at The Big Question: Renting vs Buying a Home
What is a mortgage offset account?
A mortgage account with 100 per cent offset is a fully featured transaction account that sits alongside a home loan. In many ways it acts just like a regular bank account.
However, along with the usual facilities, like ATM access and direct debit, there’s another significant advantage: Any money sitting in the offset account reduces the amount that the bank calculates interest payments against.
That’s right. The loan principal is reduced for the purposes of interest calculation by the amount of money in the offset account, without increasing the repayment amount.
How does an offset account work?
An example may make it easier to understand how an offset account works. If a home buyer has a principal of $350,000 outstanding on their mortgage and also has $10,000 in a linked 100 per cent offset account, the bank will only charge them interest on $340,000.
The money they save in interest goes straight into paying down their loan principal, which has the effect of reducing the interest paid over the life of the loan, as well as the overall loan term. Less money paid off faster.
When clients realise that banks calculate interest on mortgages daily, offset accounts can be used proactively. For example, getting salary paid into an offset account means the loan principal is in effect reduced by that amount as soon as it is paid.
Savvy clients may even choose to use interest-free days on their credit cards to pay for goods and services, so they can keep cash in their offset accounts working for them.
A redraw account can be a very good option - as it has the same net result as an Offset enabled account, for a potentially lower price. This is explored further in the video: Whats Better? - Offset vs. Redraw.
Where can I get help with this?
We help people like you apply for and secure appropriate home loans every day, and many will have an accompanying offset account. We will usually compare a range of competitive products, and look at loan features like offset accounts so our clients can make informed decisions.
Anyone with a mortgage can choose to have a linked offset account, although it will depend on the loan type and institution. It’s always best to check the offset is 100 per cent.
It’s important to know that offset accounts are usually included as part of fully featured home loans, which might mean you pay more in fees or a higher interest rate. So discussing your financial circumstances with a broker could be a smart first step.
For more information contact us today on 1300 733 942 or book a chat.
Game, offset, match
Clients who are serious about winning the mortgage game need to be aware that having a mortgage offset account could offer them an edge in the long term.
In any sport, a match isn’t won instantly. Points are accumulated over time. With the points scored daily by an offset account, it can be game, offset and match.
HOW WE SUPPORT CLIENTS
At Aspiire Mortgage Brokers, we assist clients with:
- Home Loans
- Investment Loans
- Debt Consolidation
- Commercial Loans
- Rapid Debt Reduction strategies