Why I’m Glad I’m No Longer Mortgage Free
And despite all the smart money theory in the world, the reality is that your financial strategy should make you feel relaxed and comfortable.
I secured half the mortgage interest rate for our first home – an apartment – in what turned out to be perfect timing.
That was 2005, and we put every spare penny — and some that wasn’t spare — into the variable-rate portion of the loan. With focus and frugality, we had paid for it at the end of the three-year fix. The fact that our solution was static as variable rates increased kept money there to pay extra.
Offset ‘secret weapon’
However, when I say “we invested every spare penny in the variable portion,” I mean something different: we invested money in a mortgage offset account that came with the variable rate portion of the loan.
An offset account is a “secret weapon” for eliminating debt because it allows you to use every dollar that passes through your hands twice: for its intended purpose – next vacation, tuition, fundraising emergency, etc. – and to reduce your loan interest and ultimately the time you spend in debt.
You always have the money at the end, too. It just saves you a fortune in interest along the way.
If you want to execute a life flip and, say, decide to change states like we did, filling an offset account with money instead of paying off your mortgage itself means you can have access to money to buy your next home.
In another perk, you’ve technically never paid extra on your mortgage, so you have the option of turning house #1 into a tax-efficient investment property.
“Option” is the key word when it comes to clearing accounts. Their clever use not only allows you to get mortgage free faster, but also keeps a door open for future real estate purchases.
It also quarantines your lender’s money, unlike a withdrawal facility, so you retain access to it if you run into financial difficulties.
Lenders have the ability to “recalculate” your loan balance and absorb any additional payments you may have made on the loan, if you are having financial difficulty. Read the fine print of your mortgage agreement.
But here’s the thing: Fixed-rate mortgage products typically don’t come with a full offset account. That’s why I would never repair my entire loan. At least my emergency cash pile needs an interest maximizing house.
What are you looking at if you fix now? Pay a little more up front. Recent increases in fixed rates have been, shall we say, extreme.
Mozo’s head of research, Peter Marshall, told me, “I don’t think I’ve seen such large rate movements in my [almost] 40 years in finance”.
The seismic shift in interest rate expectations is evidenced by the Commonwealth Bank’s (CBA) huge 1.4 percentage point increase in some of its fixed rate mortgages last week.
Note, however, that many lenders are becoming more competitive on their variable interest rates. Last week, the ABC cut its no-frills variable rate product by 15 basis points…if you have a 30% deposit, you only pay 2.79%.
No lag, so “no thanks”.
Across the market as a whole (comprehensive products as well), the average standard variable mortgage interest rate is now 4.37%, according to Mozo.
The Big Four Bank average, looking only at discounted packaged products, is 4.2%.
However, the cheapest variable rate on the market from a lender with a clearing account is Well Home Loans, at 2.6%. Of course, there’s a catch – those variable interest rates will go up. Maybe a lot.
If you consider that at the start of this year fixed rates were around 2%, you can see how dramatic the change has been.
Does this change my decision to fix the interest rate on part of my mortgage and keep the rest fluid, so I can work on an offset account to get off new debt more quickly?
No chance. Not much is certain in my world right now. I need my monthly repayment to be.
- The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. They should always seek professional advice that takes their personal circumstances into account before making financial decisions.
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