BANKING

Ask Paul: Should I pay a lump sum off my home loan?

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Dear Paul,

We have about $187,000 left on our home loan and about $157,000 in our offset account, with 13 years left on the loan.

We're interested in whether we should pay a lump sum off the loan limit, anywhere up to $50,000. Smaller repayments and paying it off earlier are both appealing as I'm earning a lot less due to starting my own business in the past two years.

ask paul clitheroe should i pay a lump sum off my home loan

My husband is our main income earner, but he's wanting to change jobs in the next year as well and will likely earn less. 

I've spoken with my bank and it said there was little benefit in paying off the limit as the smaller repayments mean it will take a longer time to pay the remainder of the loan.

I felt as if I didn't get a straight answer, though, and would love your opinion on this. - Tara

This is a nice problem, Tara.

With $187,000 left on your home loan, you will only be paying interest on that amount. Paying $50,000 directly into your mortgage or your offset account will not benefit you, as by doing either you will have $20,000 in credit.

My suspicion is that the bank was trying to explain that, but by the sound of things not very clearly.

I think it may not have often had a situation where people were asking about a positive overall balance on their mortgage and offset account!

I gave my bank a call to have a chat about this issue. It was quite interesting.

Even if you had $187,000 in your offset account and a remaining mortgage of $187,000, your mortgage will go into default if you stop repayments. But if you make repayments, your mortgage will move into credit, on which you earn no interest.

My bank can't say what your bank will do. But it said they would recommend you call your bank, explain the situation and reduce your repayments to the lowest level possible. Then it is up to you to keep your offset account about the same amount as your mortgage.

I like the idea of keeping a loan and an offset account.

An issue that occurs all the time is that if you pay your mortgage off completely and you are in a position to buy a new home while renting your old home, you have no debt on your old home and lots of debt on your new home.

The interest on this debt is not deductible and you have no deductible debt on what would become your investment property.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.
Comments
Mark Hutchins
June 26, 2024 4.43pm

We have a fully offset home loan and make the monthly repayment from the offset. That way both move down equally and no interest to pay and repayment for us to find each month

Peter Martin
June 26, 2024 5.02pm

I thought the writer wanted to take 50k from offset and pay to the mortgage. Not what Paul said. Therefore the mortgage would be reduced and the person could either make lower repayments or keep them and pay the loan earlier. Not sure what this negative debit is??

Yseult Louvel
July 5, 2024 9.57am

I agree, this is confusing. The aim is surely to reduce the mortgage and thus the repayments by moving from the offset to the mortgage. Debt free is surely the ultimate goal in this simple proposition?

Marcaus Muller
June 26, 2024 9.11pm

I wonder if the question was misunderstood by Paul. I read it as paying $50000 from the offset account onto the loan, thereby reducing the actual outstanding amount, but leaving the mortgage amount to offset balance the same, thus allowing the reduced repayments etc.

Samantha Clark
June 29, 2024 1.19pm

I read it the same way as Marcaus and Peter - the writer was wondering about taking $50k from the offset and paying it directly off the mortgage. That seems quite logical to me - particularly with the recent job change for the writer and the potential job change for her husband?

Rhonda Gorman
June 27, 2024 8.45am

I had thought that Tara meant that she would like to take $50000 from the $157000 offset to pay the loan down to $137000 and have $107000 in offset. In my case this wasn't as easy as it seemed it trigger us effectively having to apply to finance again of $137000, but is effective for lowering the repayments as you may get an extension on term too.