2 Kings4:6 – 7 – ‘When the containers were full, she said to one of her sons, ‘Bring me another container.’ But he answered her, ‘There are no more.’ Then the olive oil stopped flowing. She went and told the prophet. He said, ‘Go, sell the olive oil. Repay your creditor, and then you and your sons can live off the rest of the profit.’’
If you are in a position to have purchased a house and acquired a mortgage, it may be worth considering if your savings are best utilised in a savings account. They may be better off in an offset account. This sits against your mortgage.
Let’s consider an example to explain the benefit of this.
You have $10,000 sitting in savings. In a savings account, it is able to earn you 3% per annum. This is around $300 a year in interest. At the end of the financial year, you will be paying tax on this $300, which will decrease the total.
If you opened up an offset account with your mortgage and deposited your $10,000 here, then it would be acting as if you had paid off $10,000 from your mortgage. So you would be saving interest on $10,000. Now your mortgage interest rate will be higher – let’s say around 4.5%. So you’re saving $450 of interest on your mortgage each year, rather than earning $300 which will then be taxed.
What do you feel is a better investment of your money? Earning interest or decreasing your debt with the same sum of money? This is entirely up to you. One thing you should note is that setting up an offset account after you have already established a mortgage will probably cost you a one-off fee. Chances are your interest rate will increase a little too, with this offset account.
Be sure to look into all the costs. A higher rate on your mortgage to open an offset account is only worth it if your savings are substantial enough to offset the interest.
This can be a great way to reorganise your finances if the savings are going to be available to you for a length of time. It may not be worth changing things if you have them for less than 12 months and then plan to use them on a holiday or other purchase. If you are planning to continue to build your savings however, this can be a wise financial change to make. And in time, as your debt decreases your mortgage payments may also be able to decrease, resulting in you saving more for your offset. This in time will result in your debt decreasing more and your repayments lowering. And so the cycle continues! Repaying debts is a great way to improve your financial future.
It is my prayer for you:
- That you will recognise the different ways you can organise your money to best benefit your financial situation without having to bring in more income.
- That you will decide what is better for your individual situation – earning interest on savings or decreasing debt with it.
- That you will look into all conditions associated with financial accounts before committing to any.
Lord I thank you that it is possible to rearrange my finances in many different ways that can benefit me. Help me to recognise all the options and to adjust as I see fit and then to stick with this change to see the benefits.
Compare the benefits of saving money and earning interest with keeping loans down that are incurring you interest. A mortgage may charge 5% interest while savings earn you 4% interest. It is wiser financially to put extra funds against the mortgage and save interest of 5%, rather than earn interest of 4% that ends up getting taxed.