Have your ‘savings’ account within your home loan

  • 28th of October 2016
  • finances
  • interest rates
  • mortgage
  • Saving
  • saving money

If you have a mortgage and have a separate bank savings account you are doing the equivalent of driving a car on flat tyres. It works but not very well.

There are 2 main reasons for this, taxation and interest rate. Currently a savings account will pay around 2.5% interest, while floating rates on mortgages are 5.5%. So, any extra money put into a mortgage will effectively give you a return of 5.5% (by avoiding having to pay that interest charge).

You will also be taxed on interest earned while saving, so the 2.5% interest will likely be taxed at 30% meaning your effective interest rate will be 1.75%. The following tables illustrate the difference. I’ve used deposits of $200 a month, interest compounded monthly, and compared the results over 10 years:

Savings Account

Year Year Deposits Year Interest Total Deposits Total Interest
1  $          2,400.00  $             22.87  $          2,400.00  $               22.87
2  $          2,400.00  $             65.61  $          4,800.00  $               88.48
3  $          2,400.00  $          109.11  $          7,200.00  $            197.59
4  $          2,400.00  $          153.37  $          9,600.00  $            350.96
5  $          2,400.00  $          198.42  $       12,000.00  $            549.38
6  $          2,400.00  $          244.26  $       14,400.00  $            793.64
7  $          2,400.00  $          290.90  $       16,800.00  $        1,084.54
8  $          2,400.00  $          338.37  $       19,200.00  $        1,422.91
9  $          2,400.00  $          386.68  $       21,600.00  $        1,809.59
10  $          2,400.00  $          435.84  $       24,000.00  $        2,245.43

 

Mortgage Account

Year Year Deposits Year Interest Total Deposits Total Interest
1  $          2,400.00  $             72.72  $          2,400.00  $               72.72
2  $          2,400.00  $          212.20  $          4,800.00  $            284.92
3  $          2,400.00  $          359.54  $          7,200.00  $            644.46
4  $          2,400.00  $          515.20  $          9,600.00  $        1,159.66
5  $          2,400.00  $          679.64  $       12,000.00  $        1,839.30
6  $          2,400.00  $          853.36  $       14,400.00  $        2,692.66
7  $          2,400.00  $      1,036.88  $       16,800.00  $        3,729.54
8  $          2,400.00  $      1,230.74  $       19,200.00  $        4,960.28
9  $          2,400.00  $      1,435.55  $       21,600.00  $        6,395.83
10  $          2,400.00  $      1,651.90  $       24,000.00  $        8,047.73

 

As demonstrated, putting the money into your mortgage is 3.5 times more effective than having it in your bank account. It is great to save, but even better to be effective with your savings. While you have debt it is important to minimise as much of your interest cost as possible, and utilizing your savings is a good starting point.

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