Creative Finance Newsletter JUNE 2009

Nine Ways to Reduce Your Home Loan

A home loan is the biggest debt that most of us will have in our lifetime.

Here we give you some sound advice on how to take some simple steps to reduce the length and total cost of this debt.

Whilst we may love our homes, the relationship with our home loan is another matter entirely. Here are nine tips to help you reduce the term and cost of your home loan.

1. Plan to pay it off sooner

Loans are typically taken over 25 or 30 years. The longer you take paying off the principal the more interest you pay along the way and the higher the overall cost of the loan.

Use a repayments calculator to develop a plan to pay it off in less time, and increase your repayments accordingly. Once you've made the commitment simply adjust your budget, and in no time you'll be used to the new arrangement.

2. How often do you pay?

Make more frequent payments. As interest is normally calculated daily, any repayment has an effect from the day it is paid. Therefore if you’re paid weekly or fortnightly, make a payment at the same time. Paying just a week or two in advance for part of the due amount will have a noticeable effect on the interest you pay and the overall term of your loan.

This can also be a simple way to increase your repayments. For example, if you’re paid fortnightly then simple divide the monthly repayment by two and pay that. This will mean that you are actually paying 26 fortnights in 12 months which means that you’ve effectively made 13 monthly payments in the year.

3. Deposit any spare cash into the loan as soon as you can

Making extra repayments at any time is a good strategy. But remember the earlier the better, thanks to the power of compounding interest over time.

Make sure your home loan has an easy, “no charge” redraw facility in case you want to use the money later.

4. Have your income paid into your home loan

Provided you are careful to keep track of your expenses, this may be one of the best ways to use your existing financial resources to reduce the cost of your loan.

Have your income paid directly into your home loan and manage your day-to-day expenses on a credit card with an interest-free period. This way you keep the home loan balance as low as possible for as long as possible, so reducing the interest which is calculated daily on the outstanding balance.

5. Pay your first instalment as soon as you settle

You’ll immediately reduce the principal and therefore all future interest payments too, putting you ahead straightaway.

Your first monthly home loan repayment is not due until a month after settlement of your loan. By making this repayment on day one of your loan at settlement, you can immediately put yourself ahead of the payment cycle and save money at the same time.

6. Don’t reduce your repayments

If your minimum home loan repayment drops because interest rates fall, don’t lower your repayment.

By maintaining your repayment at the original level you won’t even notice that you’re paying extra, but you’ll be reducing your home loan faster.

This also means that when interest rates rise again that you won’t have to pay extra – unless you can afford to.

7. Use an offset account

Many home loans come with the option of a 100% loan offset account that can be operated like a normal cheque or savings account. Using this as your everyday account means there will be a cash balance that is reducing the interest you pay on the home loan, and so helps to reduce the term of the loan.

8. Use internet banking to manage your loan

Internet banking is really convenient and gives you instant access to your loan details.

You can set-up and change automatic repayments and make immediate transfers into and out of your loan. This makes it easier to make extra repayments, and so means you're more likely to do it.

9. Get the right home loan

It’s important to have the right home loan to take advantage of these tips and to save money. If you want to review your loan to see if it’s still right for you, please get in touch.

Using self-managed super to invest in property

Investing in property is one of the best ways to increase your wealth.

Achieving this investment goal can now be accelerated by making the most of recent changes to Australia’s superannuation laws.

Until recently, self-managed superannuation fund (SMSF) trustees could only acquire real or direct property for their super funds if they could afford to buy it outright.

Recent changes to the superannuation laws mean that SMSF trustees can now borrow and invest directly in property, broadening the scope for investors to use residential property as a wealth-building and income-generating tool.

Advantages of investing in property through a SMSF

Once you have established your SMSF in compliance with current superannuation law, members of the fund can gain access to significant tax efficiencies available in the superannuation environment.

These tax efficiencies mean investing via a SMSF may give you more after-tax money available to pay down your loan faster. Paying down a loan faster saves interest over the term of a loan and may assist you in building wealth faster for retirement.

This may mean the SMSF can acquire a larger and more diversified portfolio of investments.

Some of the advantages of purchasing property in a SMSF are provided below:

  • Interest expenses and other property related expenses, including depreciation allowance, are tax deductible for the SMSF.

  • Earnings on the fund are taxed at a rate of 15%. In contrast, if you owned the property in your personal name, the earnings would be taxed at your marginal tax rate. For many people their personal marginal tax rate is more than 30 cents in the dollar.

  • If you sell the property held within the SMSF, any capital gain relating to the property will be taxed at an effective rate of 10%. By contrast, if you owned the property in your own name, capital gains would generally be taxed at 50% of your marginal rate.

  • When members of the SMSF reach retirement, specific assets relating to those members are income and capital gains tax free.

How SMSFs can borrow to invest in property

Broadly, you can borrow to invest in a property using a SMSF if you follow the guidelines below:

  • The loan has to be for a property being acquired by the SMSF, it cannot already be owned by the SMSF. The property must be held on trust for the SMSF while the borrowing is in place. This trust is separate to the SMSF and is often referred to as a ‘bare trust’ or ‘custodian’.

  • All of the benefits associated with the property (such as income and capital gain) must be provided to the SMSF and the SMSF has to be able to pay out the loan at any time and gain full title to the property.

  • Any lender’s recourse or security against the SMSF's assets has to be limited specifically to the property being purchased by the SMSF, not to any other assets held by the SMSF.

Superannuation law is complex and as such, careful management and sound advice are of paramount importance. Penalties for non-compliance can be severe and future retirement savings may be directly affected.

Investors should obtain legal and accounting advice from licensed advisers when considering investing in property via a SMSF.

This article originally appeared in DHA’s Investor Insights newsletter.
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