I’ve always found this topic to be most interesting within the banking world, even more servicing our Custodian clients to ensure their cash flow is fully maximized.
My banking philosophy always defaults back to 2 key principles when applying the science to the following:
1. Debt Reduction of the Mortgage - ‘Non-Deductable Debt’
2. Correct Finance Set up & or Structure
With the banking dynamics continuously changing the one true fact remains –
Interest is calculated daily.
For this reason ‘Offset’ is the smarter way to manage your portfolio as all incoming resources should be deployed into the ‘Offset’ account driving down the ‘Non Deductable Debt’ account –
In setting up the correct finance structure this will enable you to build a larger cash pool faster, offsetting the balance against the mortgage.
You have a mortgage owing of $320,000@ 5% Interest Only Loan = Repayments $1,333 per month.
Let’s say you have $35,000 in your ‘Offset’ account. With the Offset account linked to the mortgage account above, it would bring the repayments down to- $1,187.50 per month.
This is a saving of $145.50 per month or $1,746 per year.
To put simply, the amount in your ‘Offset’ account is literally offset against your mortgage, meaning your repayments are the loan amount (in this case $320,000) LESS the amount in your ‘Offset’ account ($35,000) so you’re paying your 5% interest on $285,000.
Interest saved is compacted which reduces your repayments. The beneficial fact is you’re not committing to making additional or extra repayments which drains your cash flow.
Just think for a moment if your money was parked in a ‘Redraw’ account – The questions I would be asking are:
1. Am I getting a return on the redraw money?
2. Is the bank leveraging & investing these funds to generate additional profit margins?
3. Why do some banks charge to withdraw redraw funds?
Take a closer look at your portfolio, try and establish if you are correctly structured and have the maximum return on your hard earned money.
Which is the better option for your portfolio?