34 minutes ago
2
April 25, 2026 — 5:01am
Hi Nicole, I heard you on the radio talking about strategies to take charge of your finances – that was a great segment and I wanted to ask a question: With rate rises supposed to be coming, should we use our combined savings to pay off our mortgage? We have about $100,000 owing but only six years to pay it off.
Meanwhile, between us, we have about $100,000 sitting in various savings accounts for different purposes. With rates probably about to rise, shouldn’t we just knock off what we owe. It’s just that I’ve heard it said that’s a bad strategy. Why?
Well, the beautiful thing is that you don’t have to – you just need to restructure your loan so you can use your $100,000 in savings to help you pay off your mortgage early. Let me introduce you – I hope you have already heard of it! – to the humble offset account.
An offset account is like a savings account, similar to the type you no doubt have, with one critical difference: the money you hold in it is offset against your mortgage debt. If you have $100,000 in debt and $10,000 sitting in an offset account, you will only pay interest on $90,000.
So, here’s something pretty special: if an offset account is full, it doesn’t matter what the prevailing interest rate is – you don’t pay it.
Of course, that would be the same if you simply repaid your loan but with one life-changing difference: when you use your savings to repay debt they, well, disappear. Sure, they disappear into your house, but they still disappear. Let me come back to the full implications of that, though.
Money you invest is not safe – that’s the risk you take on to secure better returns.
Your loan term clearly has longer than six years left to run so you were, presumably, preparing to make more than the required minimum repayments anyway.
Here’s why offsetting all your savings against your loan balance will mean you get there a bunch cheaper: you will still have to make your required repayments each month, but they will be applied to a progressively lower loan balance so chunk away much more powerfully at your principal.
That remains a wonderful forced “savings”/wealth-building plan. To maximise it, just note that as your balance reduces, you need to move the excess that will then be in the offset account into a regular savings account or investment – you will earn/save no interest on that now-surplus amount.
What if you instead put your savings directly into your loan and relied on redraw? It’s a mathematically identical interest saving. But that’s a flawed strategy for two reasons.
One, a lender can lock up money you put into your loan itself, particularly if you get into financial strife.
Two, if you ever want to change your home into an investment property – say because you decide to spend extended periods overseas when you retire – you will only be able to claim tax deductions on your lowest-ever loan balance. Even if you then redraw the money, the property becomes useless to you as an investment, such that you’d really be forced to sell it.
An offset account carefully quarantines your cash from both your lender and the ATO. (Note you can usually have as many as 10 separate offset accounts so you won’t get your money for different purposes mixed up.)
And there’s the far more important, immediate reason that retaining your loan and keeping your savings in an offset might work out best: they currently represent a vital emergency fund.
Fast access to money in case something goes a little awry with life is probably more key than it’s ever been right now, with perhaps rising job insecurity. This is also partly why – in these circumstances – investing the money for potentially higher returns may not be the best way, either.
Money you invest is not safe – that’s the risk you take on to secure better returns. And it’s volatile on markets at the moment. But you would also need to make far more from investments than you would save by simply housing your money alongside your mortgage in an offset.
Indeed, if you are a higher-rate taxpayer – so handing over 45 per cent of your salary (ignoring the Medicare Levy) – with a 6 per cent home loan interest rate, you would need to make nearly 11 per cent from an investment to come out ahead.
Naturally, you pay no tax on what you “earn” in an offset account because you only effectively earn it. And there may be the clincher: not only is an offset account the safest approach, it’s potentially the smartest.
To get out of harm’s way of the RBA, it might seem a good emergency plan to discharge a loan early – but when you have savings, there’s a better way.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at nicolessmartmoney.com. Follow her on Facebook, X and Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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