BE DEBT FREE IN YOUR HOME - FASTER
california-love_t20_z9PNxa 2-1
Posted on: 27 Feb 2019

BE DEBT FREE IN YOUR HOME - FASTER

Looking down the road of a 30 year mortgage term can be daunting but the initial agreed term needn’t be adhered to if you are smart about how you pay it off. Below we cover some simple strategies which people have used to reduce their mortgage and become debt free sooner.

Here are six steps that may help you own your own home faster.

Use an offset facility or redraw account

Whilst a mortgage offset facility and a redraw account both allow you to offset any funds contributed to them against the interest you are paying on your home loan the main difference lays in the accessibility of the funds. A redraw facility is harder to access where an offset facility functions more like a standard bank account - something to consider.

The benefit with regards to reducing debt however is the same for example if you have a $500,000 home loan and $80,000 in an offset you only have to pay interest on the $420,000. Because your home loan payments don’t change this means you are making more progress to eradicating the home loan principal when compared to using neither an offset or redraw account.

Worth noting is the fact that in general both redraw accounts and offset facilities are attached to variable loans only; meaning that potentially a variable or split loan may be a better option than a fixed loan if your aim is to be out of debt as quickly as possible.

Have your salary paid into your offset

With an offset facility or redraw account in place, the speed at which you can pay your loan will be influenced by how much money sits in the account and for how long. This is because the amount you are offsetting against gets calculated daily therefore having your employer contribute your wages directly into your offset maximises its performance.

To further extenuate the benefits of this strategy some home owners opt to run all of their expenses from a credit card, leaving as much cash as possible in the offset until it comes time to wipe the card. In order for this strategy to be helpful you must ensure you adhere to a strict budget else risk paying the high interest charged on most credit cards. This then is a strategy requiring much discipline!

Increase your repayments

Easy for us to say? Maybe easy for you to do! Perhaps you get a pay increase or your utilities drop – you could choose to put this additional disposable income into the redraw facility against your home. Same goes for interest rates falling or a tax break from an investment or business expense.

Say for example your mortgage payments were at $4700 per month and a slight dip in interest rates meant that your repayment fell to $4400 per month if you continued on your previous payment schedule throughout the year you would have paid an additional $3,600 off your principal amount across 12 months.

Learn if you can save on your loan, speak to one of our lending specialists today.

Pay less, more frequently

If you are paying your mortgage on a monthly basis increasing the frequency at which you make your repayments may aid in further increasing the speed at which debt depletes.

For example, if your monthly payments are set at $4000, divide that by 4 to get a weekly payment of $1000 meaning that through a year you would pay a total of $52,000 toward the mortgage. Where’s the advantage? $4000 over 12 months would have a total of $48,000 in contributions toward the mortgage leaving you having paid an extra months worth of payments by the turn of the year. Clever.

Make use of that windfall

Had a lucky win on the cup? Perhaps you nailed down a sizeable bonus or tax refund, either way when it comes to receiving lump sums – adding them toward the mortgage could make a huge difference.

As easy as it is to treat yourself with this new found capital consider the difference that say $50,000 received as an inheritance could make to the overall term of your mortgage. If you’d had the place for 5 years at 4.5% interest on a 30 year term this amount could save you more than four years off the term of the mortgage. Not bad considering $50,000 wouldn't cover five years worth of payments.

Utilise a debt depletion portfolio product

Also known as loan reducers or pivot loans, these products are only available to borrowers who have a home loan and an investment loan at the same time or investors looking to purchase a property for investment. These products allow you to shift the interest from the home loan, which is not tax deductible, to the investment loan, turning it into a fully tax deductible loss. Canstar home loan expert Steve Mickenbecker said the pivot loan was a toned-down version of a “negative gearing on steroids” arrangement that was popular in the 1990s. To see how they work you can download a full case study here.

Want to know more?

Inception Finance has helped thousands of Australians reduce their debt faster. Our smart technology and Lending Specialists match clients with the right loan to help you be debt free in your own home faster. You can get in touch online or phone us on 1300 65 90 22

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Inception Finance recommends you consider whether it is appropriate for your circumstances. Inception Finance recommends you seek independent legal, financial, and taxation advice before acting on any information in this article.