What is interest saving balance?
An interest-saving balance refers to an account balance strategy used to minimize the interest charged on loans, especially mortgages or other secured debts.
The basic principle involves offsetting the outstanding loan balance with funds held in a linked savings or checking account. The interest owed is then calculated only on the net balance (loan amount minus savings balance).
Key aspects:
- Net Interest Calculation: Interest is calculated not on the total principal of the loan, but the principal minus the balance held in the offsetting account.
- Flexibility: You retain access to the funds in the offsetting account, although using them will increase the loan balance on which interest is calculated.
- Potential Savings: The primary benefit is a reduction in overall interest payments over the life of the loan.
- Availability: These arrangements are not universally offered and may only be available with certain lenders or specific loan products.
Considerations:
- Interest Rates: Compare the interest rate on the loan with the return you could achieve on other investments. An interest-saving balance is most advantageous when the loan rate is higher than alternative investment returns.
- Fees: Some lenders may charge fees for setting up or maintaining an interest-saving balance arrangement. These fees should be factored into the cost-benefit analysis.
- Tax Implications: Consult with a tax professional to understand any potential tax implications related to the interest savings.
- Opportunity Cost: Consider if the funds held in the linked account could generate a higher return elsewhere.