4 Ways to Save Money with your Home Loan

Found this interesting article where it can help save interest and your tax bill by doing a few simple things. Its surprising where you find information but when you do find something, I like to share it with people to help them save as well.//

The following tips are great for: people with mortgages, PAYG income earners, investment properties

1. Where to save: Term Deposit vs Home Loan
A lot of friends of mine put their extra savings in an at call account, usually something like a Ubank high interest online account, where at the moment the interest rate is 5.5% p.a.

However, if you have a mortgage, putting your savings in to an offset account or into the loan with redraw, you are effectively saving as well. However, what are the differences?

The difference is how the income (interest in this case) is treated. The interest income earned on your term deposit will be taxed at your individual tax rate, reducing the effective interest rate earned to 3.85% (assuming the individual tax rate is 30%. So, 5.5%x0.7).

If the savings was placed into your mortgage, it’s the extra interest not having to be paid back to the bank, making your savings rate the same as your mortgage interest rate.

Great huh?

2. Change your loan to interest only
When people obtain home loans, often times people go with the principle and interest repayment option. However, consider the interest only repayment option as well. Why?

It’s important to think about your cashflow on a month to month basis. By opting for the interest only option, you are only paying for the cost of borrowing the money where most banks are happy to do. The difference between the two repayment options are huge.

Consider the following scenario:
$500k home loan, interest rate at 6%, over 30 years.
Principle and Interest repayment option (P&I) – $2998/mth
Interest only repayment option (IO) – $2500/mth

A huge $498 “saving” per month where you can use that extra cash now to be put back into the loan. The compounding interest effect will shave years off your mortgage.

Do you ever have to pay the total loan amount back to the bank? Sure you do. However, this is the interesting bit.

You can opt for the IO option but for most banks, if its your family home, you can’t have this repayment option forever. But if its your investment property, banks are usually more comfortable to continue with the IO option because the thinking behind it is that you can always sell it without impacting your livelihood (i.e. its not selling your family home).

3. Take advantage of the 55 days interest free period on your credit cards

Put your salary or income straight into your home loan and any expenses are paid for by your credit card. What this does is extend the period of the compounding interest from surplus cash sitting in your home loan. Also, you earn the award points from your credit cards.

4. Put your salary and extra money directly into your offset account than your general account

Since interest is calculated on a daily basis, everyday it sits in your offset account, the more you save in interest.

Hope this helps.

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