Winning with Offset Accounts and Fixed Rate Home Loans
With home loan interest rates at all time lows, how can I guarantee to be a long term winner even if rates increase?
Using 100% offset facility available from some lenders, you can build yourself a capped interest rate home loan, without any extra cost. This lending strategy ensures you pay the lower variable rate today but don’t risk missing out on today’s low fixed interest rates when interest rates rise.
Example
You want a $300,000 home loan and are worried about rates going up, but you do not want to forfeit the benefit of the lower variable rate available now. Your home is worth $800,000 and you earn enough income to qualify for a home loan of $600,000.
The Answer
Borrow twice as much as you need to and split the loan into 2.
One loan is a fixed rate with a 100% offset account while the other is a variable rate loan also with a 100% offset account.
Deposit the extra $300,000 into the offset account linked to your fixed rate loan (the higher rate). If rates continue to fall or don’t increase no further action is required.
If Rates Rise
Your worse fears have been realised and interest rates have increased, your variable rate loan has gone up to 8.00%, but your careful planning is now working for you.
The solution
Transfer the money you have sitting in your offset account against your fixed rate home loan across to your offset account on your variable rate loan. This way you now stop being charged interest on the higher variable rate loan and start paying interest at the lower rate you fixed when you first took out the loan.
If rates fall again.
Interest Rates have fallen again and the variable rate loan is now cheaper than the fixed rate loan.
Your solution
Transfer the money out of the offset account against your variable rate loan and move it back to the offset account linked to your fixed rate home loan.
Summary
You only ever pay the lower of the variable rate or fixed rate regardless of what happens to interest rates over the term of your fixed rate home loan.
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