The interest you earn is the bank paying you for borrowing your money.
Conversely, the interest you pay for your home loan is you paying the bank for borrowing their* money. (*the bank’s money is actually all the bank’s client’s money)
The interest the bank wants from you is almost always going to be much higher than the interest they give you for borrowing your money, as they want to make some money as well. Hence it’s almost always more worth it to minimise the amount of money you lose to the bank’s interest than you gain from your interest.
Hypothetically if you had 400k in savings at 3% and had a 400k loan from the bank at 6%, it’s obvious that the interest you get from the bank will be less than the interest the bank is getting from you. But the trick here is that your 3% is less than that due to tax since it’s money gained, but the 6% is the same since it’s money owed. So it’s more effective to avoid being charged interest from a tax point of view as well.
Usually the interest on savings accounts is about 2% lower than mortgage rates. And youre taxed.
Using made up figures, of you had 10000 dollars on savings you might earn 400 bucks in a year. You’ll get faced a hundred and end up with 300. With an offset, you’ll pay 600 less in interest and pay no tax on it. So effectively double the return.
So you have lost 300, in my example but never notice.
How is it taxfree? Like I am not getting any interest like HISA ?
Yes. Instead of being taxed on interest you earn, youre avoiding interest you would be charged.
But isn’t interest “free money”? Even if it gets taxed I am not losing anything.
The interest you earn is the bank paying you for borrowing your money. Conversely, the interest you pay for your home loan is you paying the bank for borrowing their* money. (*the bank’s money is actually all the bank’s client’s money)
The interest the bank wants from you is almost always going to be much higher than the interest they give you for borrowing your money, as they want to make some money as well. Hence it’s almost always more worth it to minimise the amount of money you lose to the bank’s interest than you gain from your interest.
Hypothetically if you had 400k in savings at 3% and had a 400k loan from the bank at 6%, it’s obvious that the interest you get from the bank will be less than the interest the bank is getting from you. But the trick here is that your 3% is less than that due to tax since it’s money gained, but the 6% is the same since it’s money owed. So it’s more effective to avoid being charged interest from a tax point of view as well.
Understood. Thank you so much
Usually the interest on savings accounts is about 2% lower than mortgage rates. And youre taxed.
Using made up figures, of you had 10000 dollars on savings you might earn 400 bucks in a year. You’ll get faced a hundred and end up with 300. With an offset, you’ll pay 600 less in interest and pay no tax on it. So effectively double the return.
So you have lost 300, in my example but never notice.
Understood. Thank you :)