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Hi Nicole, I heard you on the radio talking about strategies to take charge of your finances \u2013 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. <\/p>\n
Meanwhile, between us, we have about $100,000 sitting in various savings accounts for different purposes. With rates probably about to rise, shouldn\u2019t we just knock off what we owe. It\u2019s just that I\u2019ve heard it said that\u2019s a bad strategy. Why?<\/p>\n
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Mortgages are set to get more expensive.Dominic Lorrimer<\/p>\n
Well, the beautiful thing is that you don\u2019t have to \u2013 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 \u2013 I hope you have already heard of it! \u2013 to the humble offset account.<\/p>\n
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.<\/p>\n
So, here\u2019s something pretty special: if an offset account is full, it doesn\u2019t matter what the prevailing interest rate is \u2013 you don\u2019t pay it.<\/p>\n
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.<\/p>\n
Money you invest is not safe \u2013 that\u2019s the risk you take on to secure better returns.<\/p>\n
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.<\/p>\n
Here\u2019s 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.<\/p>\n
That remains a wonderful forced \u201csavings\u201d\/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 \u2013 you will earn\/save no interest on that now-surplus amount.<\/p>\n
What if you instead put your savings directly into your loan and relied on redraw? It\u2019s a mathematically identical interest saving. But that\u2019s a flawed strategy for two reasons.<\/p>\n
One, a lender can lock up money you put into your loan itself, particularly if you get into financial strife.<\/p>\n
Two, if you ever want to change your home into an investment property \u2013 say because you decide to spend extended periods overseas when you retire \u2013 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\u2019d really be forced to sell it.<\/p>\n
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\u2019t get your money for different purposes mixed up.)<\/p>\n
And there\u2019s 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.<\/p>\n
Editor’s pick Fast access to money in case something goes a little awry with life is probably more key than it\u2019s ever been right now, with perhaps rising job insecurity. This is also partly why \u2013 in these circumstances \u2013 investing the money for potentially higher returns may not be the best way, either.<\/p>\n Money you invest is not safe \u2013 that\u2019s the risk you take on to secure better returns. And it\u2019s 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.<\/p>\n Indeed, if you are a higher-rate taxpayer \u2013 so handing over 45 per cent of your salary (ignoring the Medicare Levy) \u2013 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.<\/p>\n Naturally, you pay no tax on what you \u201cearn\u201d 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\u2019s potentially the smartest.<\/p>\n To get out of harm\u2019s way of the RBA, it might seem a good emergency plan to discharge a loan early \u2013 but when you have savings, there\u2019s a better way.<\/p>\n Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at nicolessmartmoney.com<\/a>. Follow her on Facebook<\/a>, X<\/a> and Instagram<\/a>.<\/p>\n Advice given in this article is general in nature and is not intended to influence readers\u2019 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.<\/p>\n Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter<\/a>.<\/p>\n Save<\/p>\n You have reached your maximum number of saved items.<\/p>\n Remove items from your saved list<\/a> to add more.<\/p>\n From our partners![\"You](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/01\/1769575333_31_a5fa20454bb2526bc6b2f8bd8c32327706d6c585.jpeg\")
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