Ask An Adviser - Should I Keep My Mortgage If My Offset Account Has Enough Funds To Close The Loan?

Top answer provided by:

Andrew White

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Hi Jayne,

Great question and thanks for asking it. With interest rates rising, you are in a fantastic position of not incurring any extra cost. Congratulations on reaching this point where your loan is, in effect, paid off – you will be the envy of many reading this response (myself included).

This is a question that doesn’t have a ‘correct’ or ‘one size fits all’ answer – it’s more about your personal objectives, feelings towards debt, and future plans. When making this decision, you should also consider your broader financial situation, since you’ve achieved exposure to the Australian property market via your home, and be aware of your superannuation and other investments.

On the one hand, keeping a loan open gives you the following benefits:

1. Access to your funds if you need them. If you use your available funds to pay the loan down, then generally the facility will be closed, and the funds will no longer be accessible for you. If you have large purchases coming up, or anticipate needing a lump sum in the near future, the current set up would work for you as the funds could easily be withdrawn from the offset and used.
2. Tax deductibility in the future. You’ll have the ability for the loan (and your current home) to be converted to a tax-deductible investment in the future. If you move and decide to keep your existing property, any unpaid debt against the property will be classed as deductible debt for tax purposes (subject to income being earnt on the property). If the debt is paid off, this opportunity will no longer be available (or becomes more complex to achieve).
3. Peace of mind. For some people, having flexibility of ownership and the ability to choose when and how to pay off a loan is important. Remember that your financial decisions should always be made with your personal goals and values in mind – whether that’s reducing work hours, enjoying holidays/hobbies or spending time with friends and family.

On the other hand, fully paying off and closing the loan would provide the following benefits:

1. Cost of the offset facility. Generally, the cost of maintaining an offset facility is between $250-$500 a year. In the event that you paid the loan off and moved to a transaction account only, you would achieve a saving on account maintenance costs.
2. Repayment requirements. As you mentioned, having the loan open will keep the requirement of making fortnightly repayments going. As interest rates continue to rise (likely in September and October) these repayments will continue to increase.
3. Your attitude towards debt. My grandfather always disliked having debt, and one of my earliest money conversations with him was about eliminating all his debt as quickly as possible. For him, having no debt was important and gave him satisfaction. For others, having debt and using the funds to buy an asset provides the same level of satisfaction. This is a question you’ll need to ask yourself. One of the things we focus on when giving advice is the concept of “My Good Life” and what that means to you.

You could also consider diversifying your investments and using some of the funds in your offset account to invest in other asset classes (like shares or bonds), or even start building your superannuation nest egg for the future.

There are a few different routes you could take with this one, and I’d love to hear how you go.

All the best,

Andrew.

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Article by:

Andrew White

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