Mortgage Broker – Established Residential Investment & Home Loan Specialist

Home Loan Debt Reduction - Refinance to a Lower Interest Rate

Home Loan Debt Reduction

 

Hello, Nathan here and welcome to my Home Loan Debt Reduction webpage where I am going to detail to you the benefits of paying down your Home Loan. If you are ahead with your Home Loan Debt Reduction and are wanting to refinance to a lower interest rate, then feel free to get in touch by jumping over to my Contact Us page.

If you are keen to know why I recommend ALL of my clients to strive with their Home Loan Debt Reduction, then please read on.

Home Loan Debt Reduction – Simple Techniques

As a golden rule I teach all of my clients when wanting to see Home Loan Debt Reduction is to pay ‘Accelerated Home Loan Repayments’, which I can hear you asking, ‘what is Accelerated Home Loan Repayments?’ Put simply, paying 1 extra monthly Principal & Interest repayment per year, for example:

  • Current Home Loan Repayment = $2,000 per month
  • $2,000 per month × 13 months (1 extra month) = $26,000 ÷ 12 months = $2,166.67 per month
  • Paying an additional $166.67 per month is equivalent to repaying 1 whole extra loan repayment

WARNING: Do not be fooled by unscrupulous Bank Loan Officers, which I have personally seen recommended to clients that they pay fortnightly but instead of halving the monthly repayment they have calculated it differently:

  • $2,000 monthly repayment × 12 months ÷ 26 fortnights = $923.08 per fortnight

By repaying the monthly repayment on a fortnightly basis will save you approximately 3 months off your 30 year home loan term and if you are lucky it may save you $1,000 in Bank Interest over the loan term compared to doing it properly:

  • $2,000 monthly repayment ÷ 2 = $1,000 and paying $1,000 per fortnight, which is equivalent to:
    • $1,000 × 26 fortnights = $26,000 ÷ 12 = $2,166.67 per month

The fact that their are 52 weeks in the year ÷ 4 weeks = 13 compared to 12 calendar months means you can beat the Banks at their own game when you understand their dirty tactics in trying to keep you in debt.

So for a minimum Home Loan Debt Reduction, paying Accelerated Home Loan Repayments on an average size Home Loan of $350,000 at an average interest rate of 7% your Home Loan Debt Reduction would save more than $100,000 in Bank Interest and at least 6 years off a 30 year home loan term!

Not a bad return for such a small sacrifice that could assist you to retire debt free…

Home Loan Debt Reduction – Guaranteed Return

Should you pay off your Home Loan OR put money into a Savings Account OR invest in Managed Funds?

I cannot give Financial, Legal or Accounting advice and I highly recommend that you seek your own professional advice. What I will do though is detail some of my own number crunching when it comes to Home Loan Debt Reduction VS Savings or Managed Funds.

Some people like to save money outside of their Home Loan, which is a great idea so you know what is your to spend and what needs to remain off the Home Loan to ensure that it is paid off quickly but what you need to know is the effectiveness of having a flexible Home Loan that allows you to add extra into an Offset Account or directly into your Home Loan Account, especially when Home Loan Interest Rates are always higher than Savings Account Interest Rates and for this example I am going to use a 1% difference:

  • $2,000 in a Savings Account @ 6% = $120 interest earned over 12 months that you now have to declare to the ATO so it can be taxed
  • $120 – 32.5% (tax bracket) = $81.00
  • Therefore the Interest Rate is 4.05% after tax (6% – 32.5% = 4.05%)

Compare this to having $2,000 sitting in your Offset Account or Redraw Home Loan facility:

  • $2,000 @ 7% = $140 SAVED over 12 months
  • When you save interest compared to earning interest you pay $0 Tax!

So how much harder is your money, working in your favour – not the Banks, if you have your savings sitting in your Offset/Home Loan Account?

  • $81 + 72.84% = $140
  • Therefore your money is working 72.84% harder by having it sitting in your Offset/Home Loan Account, which will enhance your Home Loan Debt Reduction

But let’s have a look if we invested your money into Managed Funds instead of a Savings Account that was generating an 8% return compared to your Home Loan Interest Rate of 7%.

  • $2,000 @ 8% = $160 less 32.50% tax = $108.00
  • VS
  • $2,000 @ 7% = $140 Tax Free! Nearly 30% better return

Please Note: Managed Funds may also increase in value along with receiving dividends, which I have not taken into account. A Financial Planner will discuss this with you but please keep in mind, your property may also receive some capital gains but because it is your Home, there is no Capital Gains Tax compared which may become payable when selling Managed Funds.

As mentioned before you should seek professional advice to make sure what ever you decide is going to work for you and your risk profile.

What I really like about Home Loan Debt Reduction is the fact that it is Guaranteed. Managed Fund returns rely on Companies paying out the same or more in their annual dividends. So if they reduce or cease paying a dividend then you will not receive that cash flow, whereas every cent above the minimum Home Loan repayment comes 100% off your Principal – Guaranteed!

I am personally conservative when it comes to my own risk profile, so for me increasing my Home Loan Debt Reduction whenever possible is my priority when it comes to investing in my future. I would rather be debt free before I retire than having to rely on my Superannuation to pay off my Home Loan Debt, or worse still, having to continue to work when I am 75 and retired…

Home Loan Debt Reduction – Summary

As a Mortgage Broker, I receive an ongoing income depending on my clients Home Loan Balance, so why would I want to teach my clients how to pay off their Home Loan fast? Put simply, because I work for you – not the Banks, therefore your success is my success in the fact that if you are repaying your Home Loan quickly, you might be inclined to tell your friends about me if finance becomes a topic at the next BBQ. And if you repay your Home Loan quickly, you may be in a position to buy an Investment Property in the future and hopefully you use my services again.

As a Mortgage Broker, if I don’t do the right thing by my clients, they don’t tell anyone and my business potentially would collapse because my client would go elsewhere, which is why I teach all of my clients the tips and tricks about Home Loan Debt Reduction that the Banks don’t want you to know about.

For example, if you paid one extra Principal & Interest loan repayment the day after your Home Loan settled you will save thousands in interest over your Home Loan Term and yet every Bank will tell you, ‘No payment required until 1 month after your Home Loan settles’. I have even seen a Bank tell their customers no need to make a payment for 2 months after settlement!

Any good Mortgage Broker can get you into a Home Loan but a really good Mortgage Broker will teach you how to get rid of your Home Loan through specific techniques that will enhance your Home Loan Debt Reduction.

Best wishes with your own Home Loan Debt Reduction!

If you want to know more, please, feel free to get in touch.

 

Nathan Daniell
Managing Director / Mortgage Broker
Simplify Your Mortgage Pty Ltd
Australian Credit License Number: 387974
M: 0413 615 913
E: support@sym.net.au

P.S. I hope you have got something out of my Home Loan Debt Reduction webpage and I thank you for taking the time to read through my article.

 

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