Latest NewsUse the Crunch and 'cash In'Sunday, 28 August 2016

As our economic recovery gets more assured by the day, rate rises are back on the agenda. Perhaps not this year but maybe mid-next year. And perhaps a couple of per cent in quite a short period.

Which means your window to turn the credit crunch into a free lunch is slowly starting to shut.

You may not realise it but if you're smart and act fast you can take what appears to be universally negative and make it personally positive. Consider this: at an 8 per cent interest rate, the typical Australian can expect to pay almost $300,000 in home loan interest (based on a 25-year loan of $220,000). But at a rate of just 5 per cent, where we stand today, the figure is just $166,000. It's a tremendous saving. However, you can do even better than that.

Yes, times are tight but, assuming you're in secure employment, they should not be nearly as tight as a year ago. Thanks to the enormous 4 percentage points by which rates have fallen since September and the drop in the petrol price, most families are some $600 a month better off.

And here's where you have the power to really turn the environment to your advantage ... if you keep paying that $600 surplus on to your mortgage, you'll save a further $69,000 in loan interest.

So from donating almost $300,000 to your bank for the privilege of using their money, your bill will have plunged to a figure south of $100,000.

Of course, the above calculations are predicated on the current low interest rates sticking around for the life of your loan, which we've already established is not going to happen. But the more you can shovel on to your mortgage while rates are low, the more of these savings you will secure.

Remember every extra dollar you repay comes straight off your principal, which means it's a dollar on which you'll never again pay interest. With rates poised to rise, even small overpayments could save you tens of thousands of dollars.

But if extra repayments are a pipe dream right now, be aware there is a way to use every dollar that passes through your hands both for its designated purpose and to take advantage of the credit crunch.

The humble offset account, used cleverly, is a debt-busting secret weapon. The offset account is a savings account connected to your mortgage and any money you hold in it is "offset" against what you owe; so if your loan is $100,000 but you have $10,000 in an offset, you will pay interest only on $90,000.

Keep any savings for emergencies, holidays, school fees in such an account, and have your salary paid into one as well. Then live off a credit card so it can sit there for the month. This will dramatically slash your interest bill, ensuring a much larger portion of your minimum repayments goes to you, rather than to the bank.

In fact, $10,000 in an offset alongside the average loan will save an incredible $55,000 (at 8 per cent). And remember, that's not cost you a penny.

As I said, make the right moves now and the credit crunch could actually set you up for life.

The Credit Crunch edition of Nicole Pedersen-McKinnon's book, Halve Your Debt and Double Your Freedom Without the Mumbo Jumbo, is out now. nomumbojumbo.com.au.

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