Accelerating debt reduction
Welcome to the finance update for the week ending 9 September, 2023.
Two months in a row of cash rate stability with the RBA keeping a level head again this month thankfully. The last time the RBA left rates unchanged for two consecutive months, interest rates had never been lower. Is it too early to start thinking about rates moving lower?
Speaking of the RBA, it is the final month at the helm for RBA Governor Philip Lowe. In his last speech a few days ago, he did make some comments about the role of the media as it relates to public sentiment towards him.
“But the media has a responsibility too,” Mr Lowe said.
“My view is that we will get better outcomes if the public square is filled with facts and nuanced and informed debate, rather than vitriol, personal attacks, and clickbait. As a society, we have got work to do here.”
Interesting comments to ponder.
In this week’s newsletter, we take a look at a strategy to reduce home loan debt quicker using an offset account and a credit card. It can work well if done right, but there are things that need to be considered to ensure it does what it’s meant to do.
Using a combination of an offset account, a credit card with an interest free period, and a healthy dose of discipline can shave years of the time it takes to pay off a home loan.
Whilst this is a well known strategy, there are things your clients need to be aware of to make it work as planned. Below we summarise how it works, as well as some things your clients need to be aware of when implementing the strategy.
How It Works
Deposit income directly into the offset account
Opt for salary direct deposit into the offset account to save time and maximise savings without manual transfers.
Stick to a budget
Calculate monthly expenses by reviewing bank statements or using a budget planner, covering groceries, transport, utilities, and extras like subscriptions, gym, and dining out. Keep your salary in the offset account as long as possible, excluding mortgage payments.
Spend with a credit card
Utilise an interest-free credit card for monthly expenditures and pay the full balance before each statement’s due date to avoid interest charges.
Clear credit card balance each month
Settle the credit card balance prior to the due date using funds from the offset account to prevent interest charges. Consider making payments a few days in advance to accommodate processing time.
What To Watch Out For
Stay diligent with your payments
To fully benefit from using a credit card to enhance offset account savings, it’s crucial to consistently meet all home loan and credit card payment deadlines. This entails considering due dates and processing times.
Terms and conditions of the offset mortgage
Since each home loan comes with unique terms and conditions, it’s crucial to carefully review the fine print before implementing this hands-on approach. Key factors to consider include the eligibility to add an offset account, allowable account transactions, applicable fees, and the frequency of repayments.
Ensure it’s a genuine offset account
Both offset accounts and redraw facilities can reduce mortgage interest. However, this tactic exclusively works with a bona fide offset account, as redraw facilities aren’t designed for regular transactions.
If your clients would like to know more about whether this strategy can work for them, have them call us on 1300 366 296.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.