The interest you earn in a high interest account or term deposit attracts tax. Come tax time you will have to declare the interest you have earned and in turn pay tax on it at your personal income tax rate.

This means that although you may be making some good money from your savings account, the tax man cometh and you can say goodbye to most of your earnings. Though if you have a mortgage, consider this for a second

Your mortgage is a debt, a debt that is costing you 7-8% daily. Your high interest account is likely paying you 4-6% daily and that’s without the tax man taking a slice of your earnings.

This means by having your money in a high interest account, you are technically 2-3% worse off.

So why would you use a high interest account when you could simply add extra money to your mortgage, save on interest and in doing so reduce your mortgage by years? How to use your home loan for savings

Yes you don’t earn interest like a normal high interest account, though you are saving so much in interest that it offsets this one point and actually leaves you better off.

First off, ensure your mortgage has redraw functionality. You want to ensure that any money you put on your mortgage, can easily be withdrawn with no penalty when the time comes that you need it.

Most people who are using high interest accounts are doing so to reach a goal. Sometimes the goal never eventuates or day to day living eats into the money. Putting this money on the home loan means that regardless of what you do with it, every day it sits on your loan means a saving of interest, tax and a huge reduction to the life of your loan.

It really is the smart person’s savings account.

Posted by Alex Wilson – Savings Guide on 4th August, 2011