Are you blowing or growing your Mojo?
Over the silly season I have spent a bit of time out of the office and have spotted orange cards with “splurge” taped to them on at least a half dozen occasions. The Barefoot Investor seems to be gaining more momentum every day in Australia and has some great tips on how to budget and save. Scott Pape’s book and subscription only “Blueprint” are going a long way to helping make money management easy to understand for a wide spectrum of Australians. Anything that makes savings and budgeting easy for people to save we are all for. Using poetic license when writing on such a complex area as personal finance is essential as this needs to appeal to a wide audience.
The question I found myself asking was. “Is the rate on the ING High Interest Saver account (currently at 2.8%) that Mr Pape “recommends” higher than the interest paid on a mortgage?”
So I thought why not break this down a little. I had a chat with Julie Bishop, one of the specialists in my network, who has a depth of experience in this area so credit goes out to her for helping me put this short piece together.
You must have seen this by now.
The “bucket” concept is certainly not a new one in financial circles. This has been used for years, if not generations, to help manage cash flow. What we are trying to figure out is if this system could work efficiently with a mortgage which is often the highest debt a person will ever have and attached offset accounts.
So what is an offset account?
Offset accounts are relatively common. If you have a mortgage of say $500,000 and have savings of $50,000 in an offset account you would pay interest on only $450,000 of your mortgage. So while your funds don’t earn interest as they would if they were in a pure savings account, they reduce the generally higher rate of interest you pay elsewhere so essentially you are making money. Plus as you are not earning any interest, there is no tax to pay.
Lets look at a quick example:
$50,000 in high interest account (2.8%) = $1,400 (taxable)
$50,000 in mortgage offset account (3.8%) = $1,900 (not taxable)
I had a quick look around and found that Macquarie, Commonwealth (including Bankwest) ME Bank and Suncorp all offer multiple offsets. There may be a few more, I do not provide mortgage or finance advice so don’t have access to the tools that a good finance broker would.
So I have a mortgage and savings, I should be doing this immediately…right?
Making an extra 1% on your savings is great but if you are paying 0.5% higher interest across your entire loan for the privilege of having multiple offsets this is going to have you at a significant loss. You need to figure out if these match your needs. If you are a sole trader or run a company it can be very handy to keep tax or other funds in separate accounts, you could even use them to save for a holiday or the kids over and above your bucket system. There are also Professional packages are offered by some lenders and we often find these allow borrowers get into a home sooner with a lower deposit based on high future earning. Yes Doctors, this is you. Macquarie, NAB, Westpac and Commonwealth all offer up to a 90% LVR with no LMI. ANZ and BoQ Specialist can go even higher, with a few tricks. LMI may sound like a small thing but typically costs around $20,000, depending on what you are borrowing.
Hold on a sec, what is this LMI and LVR stuff?
LVR or Loan to Value ratio is a percentage that the bank will lend you against an asset like your home. So if your house was worth $1,000,000 and you put in $200,000 deposit you would have an 80% LVR which as a rule of thumb is the maximum a lender will accept. If you go over this amount they will want to “insure” the bank in case you don’t pay your mortgage. This is LMI or Lenders Mortgage Insurance.
That is good isn’t it? You never stop singing the praises of insurance. More must be better?
While I like to cover any risk under that sun that can be insured for a reasonable price LMI doesn’t work in anyone’s favor other than the bank. The cost of this is often bundled into the mortgage so you pay for it over 30 years and if you do ever claim it you won’t see a cent. This pays the bank and then the insurer often asks for that money back. Paying for insurance on an unrelated party is never in your best interest.
You should have a good relationship with your financial planner and also an independent mortgage broker that can help you work out a structure that is right for YOUR needs. There is no quick fix to why you cant save or which lender, or pillow for that matter, is right for you. Having multiple offset accounts with $200 in each charging you additional fees and a higher interest rate on your mortgage, plus a higher rate over all, is most certainly not going to help you get ahead. Each part of your financial world need to be carefully considered in how it might impact other areas. This article was written as a concept only and should not be considered as financial advice in any way.
Notes: Some lenders offset accounts are only partially offset against Fixed rates and fully offset against variable. There are also often a small fees per offset account that we have not considered above.