Personal Finance & Money Asked by BenniMcBeno on January 8, 2021
I’ve been looking into my finances lately (I am an armchair finance person).
And it looks to me, that my return on investment isn't
going to be the same, if for example, I put $12000
in an offset for a year OR pay an extra $1000
a month, for 12 months off my loan.
ROI on paying extra to mortgage
Firstly I go here: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/mortgage-calculator#!how-can-i-repay-my-loan-sooner
I enter:
owing: 250,000 Repayment: 2,000 Monthly, Interest Rate: %3.36
The calculator gives back:
Time Till Completion: 12yrs 11mnths, Interest Paid: 58,133
Then I think about the $12000
dollars. If I pay an extra 1000
a month over the next year 1000*12=12000
:
I enter:
owing: 250,000, Repayment: 3,000 Monthly, Interest Rate: %3.36
The calculator gives back:
Time Till Completion: 8 years, Interest Paid: 35,080
So I’m saving 58133 - 35080 = $23053
over 8 years, next I get a yearly return number 23053/8=2881.62
.
Finally it looks to me like 2,881 is 24% of 12,000
Said in another way, my yearly ROI for $12000
is 24%
.
ROI on leaving cash in offset
Firstly, again, I tried to get a calculator to do the heavy lifting for me: https://www.ing.com.au/home-loans/calculators/offset.html
I enter:
Loan Amount = 250,000, Loan Period = 13 yrs, Interest Rate =
3.36%, Offset Account Balance = 12000
The calculator gives back:
Interest could save = $6,347.32
Get a yearly return 6,347/13=488.23
. So it looks to me like 488.23
would be my yearly return on putting $12000
in an offset. Which is a yearly ROI of 4.06%
This leads me to believe paying of an account is much more beneficial than putting funds in an offset. Is this correct? Am I missing something?
I always believed using an offset account or paying of a loan faster would equate to “saving” the same amount of money in the end.
This leads me to believe paying of an account is much more beneficial than putting funds in an offset.
Is this correct?
Yes
Am I missing something?
Nope.
The money accumulating in the offset account is just sitting there growing at 0% while the mortgage balance is growing at 3.36%.
If you could find liquid security which guaranteed you 3.36% after taxes then the ROI on that would be a "break even" compared to paying the extra $500/month (though with extra work). Anything higher than 3.36% and you'd "win".
Answered by RonJohn on January 8, 2021
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