I've heard from a few people that most home loans could be paid off well before the term of the loan. I want to understand what are the strategies fellow ozbargainers have adopted to smartly pay off their home loans. Thanks in advance for sharing
Paying off Home Loan Faster
Xplosive on 25/11/2016 - 12:00
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So my strategy is a little different.
Firstly, I'm not trying to reduce my loan amount at all as my plan is to convert my current property into an investment.
Currently on an interest only loan with an offset account. Everything goes into the offset account(s). I'm treating it as if it's the same as if I'm paying principle + interest, except the money is going into my offset instead of the actual home loan.
As someone mentioned in a previous reply, pay everything with a credit card to leave money in your offset account for longer (also get rewards points in the card just for buying everyday things), then pay the whole card closing balance in full each month.
Money in the offset will slowly build up while effectively lowering the interest being charged on the loan. When I'm ready to upgrade and convert the existing property into an investment, I can maximise the interest on the investment loan (as the loan amount is higher than if I paid it down) which to my understanding is tax deductible.
If I decide down the line that I don't want to convert it to an IP, I can simply just use the cash and put it all into the home loan, or sell it and then upgrade, but I've structured it so I have the option to do either.
Edit: Also want to emphasise that it has to be an offset account as there are tax implications of putting in extra money into your loan and taking it out as a redraw.
Good plan, very common for those with plans to "upgrade" in 5-10 years.
I thought about doing this when we bought our first house but my wife wouldn't be convinced that an interest only loan was a good idea on our "first home". It just made her nervous for some reason despite the risks being much the same with a regular P+I loan.
Risk are def not the same.
Elaborate?
Let me rephrase, If you are young and have enough equity and excess cash flow to reduce the interest portion this could be an acceptable option. But you are leveraged to the max and you are barely clearing the interest it is a risk if you never convert you home into an investment property you could possibly encounter refinance risk. How valuation could go down.
I think people on interest only loans really have to manage their options carefully if they are highly geared. Every situation is different I guess.
A comfortable loan of say 500k P+I with repaymets of say $2000/m a month is no less risky than a 500k int only loan of $1600/m. Sure you need the discipline to save that $400 in your offset account, but that's not more risk in terms of debt level.
@Skramit: If you take interest only loan, you still need to pay off principal amount at some point.. right? Mainly in case if you had to keep property for long term for any reasons, you aren't in good position of you have been servicing only interest for years without paying single penny off towards a huge principal outstanding.
@virhlpool:
True, although the point of the interest only loan for me personally is to pay off my home loan faster. What happens at the end, is either sell up with a small profit/small loss. Or keep it going and continue to claim the tax duduction and build your wealth. As long as you stay in the black or roughly even with growth over the life of the loan you have a few options at the end.
This is how to do it, currently in the process of turning my PPOR into an IP and I'm so glad I did my reasearch on somersoft etc. before making some big mistakes.
New loan will also be set up this way, not that I plan on upgrading in the near future but who knows what will happen..
If you are financially disciplined, use your good credit rating to apply for credit cards with balance transfer facility (eg. city bank, check to self) and put the money in offset account.
Yea anz seems good with this. I've got 30 bucks a year credit card and I've been able to negotiate 0% bt offers by going to retention team.
Sub let the spare bedroom / rumpus room. Use the income to pay off the mortgage.
YES! Board is tax exempt, so if you have a house where you can section off a section and charge someone 'board' to live there then you can easily pay an extra $250/week off your mortgage. If I were to build then I'd definitely put a granny flat or similar in.
Board lodgings are tax exempt? That's interesting, I would have thought ALL income was taxable (assuming you legally declared all)
Yes I'm pretty dubious about that. I dare say his definition of tax exempt means "don't say anything and taxman won't know"
Offset - deposit as much as you can every time.
Credit Card - Use it for your everyday purchases then pay off on due date. Do not miss a full repayment.You won't see much savings initially but after 2-3 years you can see the benefits
If you can afford more then pay more you will be glad when you get to the end that you did it
Another wee tip is do the opposite of what the Banks propose.
As an example I remember 20 years ago when interest rates were 17% and were starting to drop, the Banks were pushing for people to lock the interest in when it dropped to 17% and constantly pushed as it dropped down the scale.
We had friends who locked in at about 14% for 5 years at the banks recommendation.
We didnt, we did the opposite and left it and it dropped to todays levels
The Banks dont care how much they rip you for they only care for profit and you have to provide it so dont believe themedit Currently we have record low interest rates but will the Banks let you lock that in, funny that eh
Yes they do. You can still get a fixed rate under 4%. Better move quickly though…
I simply pay twice the amount of my fortnightly payments. I also have not varied this amount despite dropping interest rates, so ends up being a bit more than twice that required.
I'm in the exact same Position as you :)
Here is my advice.
a) Get a loan with free redraws.
b) Completely ignore what the bank says you should be paying them, and instead make payments assuming a 15 year term (yes, your payments will be higher and it will hurt - but your interest burden over the life of the loan will be massively reduced).
c) Don't change your repayment amount when interest rates go down.
d) If you get any performance bonuses from work - pay at least 50% of it into the loan.Why a) rather than just using an offset account? For many people, there is a considerable psychological difference between redrawing money vs spending money from an offset account ( http://thewealthguy.com.au/the-problem-with-mortgage-offset-… ). You want to exploit that difference. You want it to hurt to redraw money from the loan.
Note there mayb e negative tax implications of this approach if you plan to rent out your place in the future - be aware of that. https://forums.whirlpool.net.au/archive/1753945#r30579216
Hi guys,
Wanting to get some opinion. My current home loan is 4.18% variable comparison rate for $130k. I was thinking of switching to loans.com.au for 3.81% variable comparison rate. Is it even worth switching?
Not worth switching as there could be discharge fees involved. $130k is small so won't have a huge impact
Exactly my thoughts but thought a second opinion wouldn't hurt :)
Do you have family members who can deposit all their savings into an offset?
That's what I'm doing at the moment, currently have $232,156.59 in my offset account. Saving a shit load in interest!
Saved $4,000 so far. That's my wage for almost 2 months.
How does that get pass the ATO?
Serious question : At what point do you need to report any personal loans to the ATO? eg. if you were lent $2k to buy a car from your parents - sort of the same isn't it? I understand at some point AML may be triggered etc by the banks - if you can pay off more than you earn
May understanding is that 10k is the limit for individuals depositing money into your account without questions. Once it starts getting above that I thought it raised flags with the ATO.
cheers serpserpserp, Would be interesting to do a short stint at the ATO, if you could get access to such info
@serpserpserp: There is always questions asked when money Exchanges hands through an account. Any reporting is mainly used to target money laundering and terror financing.
ATO can submit a request any time to your financial institution and request information about your activity.
Most of these requests are triggered by your tax lodgments or lack there of, however using a tfn to keep all interest paid on investments.
Do you seriously think tellers won't get suspicious if they see you deposit $9,990 three times a day. LolWork within the legal constraints of the system and you have nothing to worry about.
Death and taxes…. Always
@slikguy: I was 18 years old when I walked into Westpac and randomly deposited $45,000 cash. No questions asked
- Have a 100% offset account.
- Have your pay and other income go straight into offset account.
- Pay all possible expenses using credit card (up to 55 days interest free).
3a. Pay off full balance end of each month. - Review your home loans at least every two years. Compare rates and ask your bank for a reduction (ask to be put through to the retention team: Quote competitors rates. Say you will leave if they can't match.
If you can get a better deal elsewhere and your bank won't match it, then change home-loan providers. The pain of a bit of paperwork could save you thousands over a few years.
Take advantage of 0% purchase offers on credit cards, keeping money in offset for longer. Check to make sure the interest savings offset any annual fees. Obviously the quicker you reach your limit, the higher your interest savings will be over the length of the offer.
a) NAB Low Rate Card (15 months 0% on purchases). $59 Annual Fee
b) NAB Low Fee Card (15 months 0% on purchases). $30 Annual Fee
c) Virgin Australia Velocity Flyer Card (12 months 0% on purchases). $129
d) Citi Clear Platinum Card (9 months 0% on purchases). $0 (first year) Annual Fee
e) ANZ Low Rate Card (6 months 0% on purchases) $58 Annual FeeTake advantage of 0% balance transfer offers on credit cards, keeping money in offset for longer. Check to make sure the interest savings offset any annual fee or balance transfer fees that may apply. (The higher the credit limit you can get to perform a balance transfer, the more interest you will be saving. Generally need to look at balance transferring at least $5000 in our low interest environment to make this type of transaction worthwhile, however $0 annual fee ones are worth doing for whatever you can get.
a) St George Vertigo Visa (18 months at 0% on balance transfers). $55 annual fee
b) Bank of Melbourne Vertigo Visa (18 months at 0% on balance transfers). $55 annual fee
c) ANZ platinum credit card (12 months at 0% on balance transfers). $0 annual fee in first year
d) Citi Simplicity Card (0% for 9 months on balance transfers). $0 annual feeIf you have a rewards credit card attached to your loan, balance transfer from this account to still earn points on your purchases while deferring payment to your balance transfer cards.
If you take these approaches, you should keep an eye on your credit report/score'. You can do this by requesting your credit score through each of the credit providers once every twelve months or after you have been declined for credit. Leave at least a month before applying for new credit and be prepared to drop most of your cards if you do refinance your home loan. Aim to hunt for credit card offers a month or two after refinancing. If you intend to refinance in the next 6 months, it's probably best to avoid the credit card approach and give your credit report some breathing space.
http://dnb.com.au/ - Once a year
https://www.veda.com.au/ - Once a year
http://www.experian.com.au/credit-services/credit-reports/or… - Once a year
https://www.creditsavvy.com.au (monthly update)You need to be financially responsible to take this approach and make sure the money is sitting in your offset, ready to pay the balance before the expiry period for this to be of any benefit to you. If you still have a balance owing at the end of the offer period, you will quickly start to lose any benefit through the high interest rates usually charged. You also need to be willing to go through the process of cancelling cards to avoid second year fees etc. Set calendar reminders and track your card terms in a spreadsheet or similar so you know exactly when offers finish.
- Bonus Tip - For your everyday purchases like coles and woolies, look for discount gift card offers. Your state motoring association, some electricity providers or a website like cashrewards can offer 5% discounted rates on digital and physical gift cards, sometimes offering slightly more. A $5000 dollar spend at woolies across 12 months, which is about $100 bucks a week saves you $250 in a year.
I find it interesting that lots of people suggest putting all possible income into home loan in the early years and living very frugally until you've paid it off, not going out or enjoying expensive events or not having holidays etc… I think you have to take a bigger perspective to all of this. If you are happy living a simple life for the first 15 years, then by all means do it, but the reality is home loans are just a part of life and I take the perspective that you have to enjoy life every single day, as you could be dead tomorrow. I enjoy a decent holiday every year and buy objects and experiences that bring joy to my life and my family. Yes, I could probably invest an extra $10000 each year into my home loan if I went without all of this, but at the end of the day as long as I feel comfortable in my position and I'm not financially going backwards, what does it matter if I pay a bit extra over my life if I have thoroughly enjoyed it. I can't imagine spending every holiday period and weekend sitting at home watching TV or doing nothing in particular because I'm busy squirrelling away money to pay off my home loan sooner.
Agreed. I'd rather not have a house if I then couldn't enjoy myself. No one likes hanging out with THAT GUY who is always double checking the bill, ordering a coke instead of a meal, and never spends a cent. Solid reasoning around not living beyond your means
The first year of the loan is the most important. Every extra dollar you put in during the first year saves you $2-3 over the life of the loan.
If you paid double the minimum just for the first year the 30 year loan becomes a 15-20 year loan. If you paid double in the second year as well it drops to 10-15 year loan.
Then you can go back to just the original repayments (or keep going if you can keep it up). There's diminishing returns in paying more than double or paying double in later years.
Use some online calculators to see what additional repayments do to your loan. Most of them assume you'll pay double forever but if you whip up your own in Excel you'll find it's double payments in the first/second year that make the biggest impact.
Strategy to pay it off earlier???
Pay more??? Duh… throw every cent you got at it.If you are super serious about smashing your home loan term then nothing beats extra repayments. At a minimum extra repayments should be around 20% of your take home pay but the serious repayers will be targeting between 50% and 70% of take home pay.
The real skill to this strategy is being able to structure your lifestyle to live off the remaining take home pay.
so the super serious repayer would be aiming for 70% to 90% then? ;)
Pay more than you think you can afford, you will adapt your spending habits and it will become second nature.
Don't overpay. Which means not buying in this market. Yes, that's right, NOT buying can save you money!
Do I buy in two years when the market is up another +10-15%?
If you have a partner who is also employed, manage all expenses in one persons salary. Second salary straighr into the offset account.
Rather than paying off early, might be good to leave money in the offset. You never 5 or 6 years down the line you may want to upgrade, and convert the current place into an investment property.
DYODD
What's an offset account?
The easiest way to think about it is that's it's a special type of savings account.
That is, you put your money into it as you would with your normal everyday savings account. However, the benefit is that any money in that account will not attract interest repayments -> I.e., it offsets that amount.
For example, say you have a $100k loan. If you put $5k into your offset account, you only have to pay the interest on $95k. Interest is calculated on the full amount - the amount in your offset account. Then, if you need the extra money, you generally can take it out without any issue for everyday activities as needed.
That is an excellent explanation thank you so much, i now can see the benefit in it
How does it compare with regular strategy in terms of interest earning/saving:
- Option A) If that $5k was put in a separate high interest saving account (say earning 3%).
- Option B) Since $5k is put in offset account, you save interest that was due on that $5k portion of your loan but at the same time you don't earn any interest on that $5k (if my understanding is correct).
So in which of above two options you end up saving more?
Generally you end up saving more on Option B, but it will vary. Why?
It all comes down to how much interest you earn, versus how much interest you're paying:
- If you're earning 3% interest, but paying 4% interest on your loan, you're losing 1% in total. Generally this will always be the case.
- However, if you happen to earn say 5% interest, and pay 4% interest on your loan, you're gaining 1% interest so it makes more sense to invest, but you'd have to be pretty lucky to do that.Do remember though that by putting it into a interest account, you have to pay tax on the profit you make. Of course, if it's an investment property, this is likely balanced out by the fact you can claim the higher interest you pay as tax-deductible.
If you think of investing in different scenarios, you may end up earning more but with a higher risk. So let's say you invest in the stock market, anticipating returns of 5-6%. If it works out, you're ahead by 1-2%, but if not and you lose money, you're behind overall. It all depends on what your risk appetite is and how comfortable you are investing money in higher risk scenarios versus just playing it safe.
Do remember though that by putting it into a interest account, you have to pay tax on the profit you make. Of course, if it's an investment property, this is likely balanced out by the fact you can claim the higher interest you pay as tax-deductible.
Thanks for your reply. I didn't get this part though. Which profit are you referring to when we are talking about putting money in interest only offset account for an investment property?
@virhlpool: He's referring to 2 different scenarios:
Do remember though that by putting it into a interest account, you have to pay tax on the profit you make
1/ IF you put money in an high interest saving account, any interest you earn, you get taxed.
Of course, if it's an investment property, this is likely balanced out by the fact you can claim the higher interest you pay as tax-deductible.
2/ he didn't refer to any profit in this scenario.
How long do you take to pay off most of your home loan?
10 years? 15 years? 20 years?Paying extra each month is usually a good strategy for paying off loans earlier.
I had a 30 years loan of $250k and paid it off in 10 years.
The loan was variable & plain (no offset, etc). I paid monthly or whenever I have money.
Did it the good old ways such as putting my extra money into the house, learnt to service my own car, cycle to work etc. I don't understand investing (shares, etc) and stayed away from them. And I was the sole breadwinner making $80k - $90k /yr with 2 kids.
In saying that I'd never get into debt again especially with today's property prices, it was the worst feeling that I spent all my time and energy just so that the Bank could take a large cut. And I was always afraid of my boss / losing my jobs because of my dependency on them.
Good job man.. I feel the same about debt as you. Currently into year 2 of a $250k loan. I am also expecting to have the loan paid off in less than 10 years all up. The strategies I've been using is offset account and putting everyday purchases on interest free credit card. As well as the offset account, I put an extra $250 per week into the loan. I know this has the same effect as keeping it in the offset account. So I may review this after reading some of the above posts.
Good luck!
The math is really simple when I did it, save more and pay more. I resisted to get new car loans etc. and although my car is 20yrs old and 330,000+km I was happy. "Social pressure" can be annoying … wife's friends had the newest BMW, bought $20k LV handbags, and such. And here I was saving $7.80 train ticket a day by cycling 20km to work.
Having no debt is very empowering. I joined a new company and one day my boss yelled at me. The next day I submitted my resignation and found a better one the week after.
Would have never had the balls to do that with a mortgage hanging over my head :)
I have mine payed off with a 100% offset and now I have an investment with the rent covering the interest.
It's good not having to worry about a mortgage.
@OzTightArse
Have you been tempted to purchase another property (and take on loan again) as an investment to improve your current/future income?The temptation is strong in that one. Every friend have multiple properties although they had not even paid their primary residence. It's like I'm the odd one out for not 'investing' or 'looking after my future' and that I will miss the boat if you know what I mean.
I guess I'll just do it the old fashion way by less spending (thanks ozb!). I've now almost saved enough money for my kids uni, and no way I'm putting that into a house loan.
The simple answer, is make half your monthly payment fortnightly. While the timing does pay off the loan a bit sooner, its the fact that you are making an extra payment each year that works the magic. If you put your Christmas bonus (gifts, savings, whatever) into the loan would virtually have the same effect. So as most of the others have said, paying extra (or offsetting) is the trick.
Obviously the answer is do a budget and see what capacity you have now and projected in the future.Think about spending in terms of decades :).
By 10 years I had 25 containers of oil. That's worth 25 x $200 = $5000 worth of service at least
I cut my own hair every fortnight = $2600
one $1 coffee a day ended up as $2200. Lunch $22,000
Containers of oil…? Are you drilling in your backyard?
You should change your username to OZMightyTightArse ;)
These days I'm soft :(
Every time I'm driving and got bored I stopped by 7-11 and treat myself $1 coffee. Taste good really!
0% Balance transfer offer from credit card and add them in offset account. 2% charges for balance transfer, saves 2.0% interest (considering 4.0% variable interest rate).
2% charge for BT is stupidity
Pay off everything you can afford. Making extra repayments put us about 180K ahead that we will never have to pay of interest. We used a redraw facility which worked great for us, no idea if offset was available or not but the redraw was unlimited with no fees so it worked for us.
To my understanding Offset and redraw are same things if you are living in the property. If it is an investment property, there are some differences of tax or something. Offset does not have any fee either to withdraw.
Skip the smashed avocados.
Can buy new and rent the property out for 2 years - around $15K return on depreciation & negative gearing structured well which could shorten loan term by 1-2 years. Capital gains implication if property sold tho.
How does that work. Will it be to risky if renting market goes down or property value?
My situation, I have an investment property with $300K loan on a 100% offset account. Now I have enough savings to offset the entire $300K loan, meaning I'm not paying any interest. However I'm getting screwed with Tax PAYG - $1.5K quarterly repayments. What should I do? FYI I don't know anything about stock market.
However I'm getting screwed with Tax PAYG - $1.5K quarterly repayments. What should I do?
But surely you'll get any over paid tax back in July the following year…?
The PAYG quarterly payments are just to spread your rental income tax over the year, so not sure how you're getting screwed?
As for what to do with your $300k in the offset account, the obvious answer is use some of it to buy another investment property. The interest on your existing investment property you would start paying again will be tax deductible again.
Not necessarily last year I had to pay an additional $150 for my tax return. This year I got back $600. What I meant by screwed was that I had to pay in advance, rather than waiting till I do my tax return.
Yes the ATO would have a sent you a letter explaining why this is the case. You are earning income throughout the year which you should be paying tax on. There is a threshold and once you cross that threshold you need to pay it in quarterly instalments.
It's pretty standard for investment income from property/shares and you're hardly getting screwed since the rental income is already in your pocket.
You dont have to.you can ammend it to pay $0. But you cant set it to do that every time
Great info in this thread, thanks to all participants. I bought my first home in Australia 2 weeks ago, as I'm 46, I'd like to get it paid off by the time I'm 60ish, offset and overpayments seem to be the way to go.
Congratulations on your purchase!
Congrats on your purchase!!!
Enjoy your golden years mate and let the bank worry about weather you'll live long enough to pay off the loan.
I have been paying monthly and suppose to pay off the loan in 10 years and as you guys suggested, if I am going to switch to weekly, I can pay it off about 7 years.
Amazing what a big difference this makes.
Many thanks for all your tips and keep them coming.
Can you elaborate please how changing payments to weekly will let you pay it in 7 years?
I am using this website to do the calculation: https://www.mortgagechoice.com.au/home-loans/calculators/how…
Other similar website will also show the same results.
For example, my loan is about 250k and based on the interest of 4% and monthly payment of 2600. That will require a payment period of 9 years 9 month
If I change to weekly payment of $700, then the period will be 8 years 1 month and if weekly payment is $800, then it will be 6 years 11 months.
Of course, this mean I have to pay a little more every week as compared to the monthly $2600.
Thanks for the clarification, but this does not mean weekly would save you a lot.
Your current monthly repayment is $2600 which is way less compared to $3033 ( when paying $700 weekly) and again way less to $3466 ( $800 weekly).Based on your situation, if you can spare extra cash, why don't you deposit $500 on 1st of every month to your redraw or offset account or increase your monthly instalment to amounts above.
I mentioned earlier in this thread that if your monthly instalment goes in 1st week of a month, you will save on interest a little compared to weekly or monthly at the end.
Yeah. I am doing my sums to see how much more I want/can put into the weekly repayment.
Also, I only get paid in the middle of the month, so I will need to put some $$$ into the account in order to kick start the weekly deductions.
I agree with all comments about changing the frequency of repayments, offset, redraw etc. Great way to pay off the loan quicker, 15 years instead of 30.
At what cost though. Assuming you get your loan at 30, why would you sacrifice your best years and miss out on all the life experiences.Most of us got upset when Joe Hockey told us to get better paying jobs. He was right though. The best way to pay the mortgage off sooner is to make more money.
Go out there, take risks, don't regret the mistakes and don't stop until you get what you deserve.
"There is a soul force in the Universe, which if we permit it will flow through us and produce miraculous results". - Mahatma Gandhi
Well said. Wish I could take your picture using my camera on Slik Tripod…
If you start your loan at 25, and pay it off by the time you are 40 - then you have plenty of time for 'life experiences'. 40 year old people are still (shock, horror!) able to take overseas trips and enjoy themselves. :)
Plus, the extra cash you have available (since you aren't paying off your home loan) gives you options. Want to change careers even though the pay is less? No worries, do it. Want to send your kids to private schools? No worries, do it. Want to take your large family to Disneyland? No worries, do it. Want to purchase an investment property for your child to live in when they get older? No worries, do it. Want to do something else? No worries, do it.
The main benefit of paying off your home loan early is that it gives you flexibility. And for most people, flexibility is more useful to them in their 40s than in their 20s. Everyone is different - yes. But I have way more options open to me now, compared to most of my peers, due to the way I paid off my home loan faster.
Congratulations on paying your home loan early. I am pleased to hear it.
You also look out of place at a night club as a 40y.o
The 2 door sports car? You mean mid-life crisis mobile? Ford Capri is not cool any more.
Crows feet and cracked heels, stretch marks and sagging.
Dad bod and beer belly, indigestion and high blood pressure.
A pill for everything. Low testosterone, Menopause.
IVF gave us time, just not enough time to party all night go to work the next morning.
Today's music and current hairstyles…..just don't understand them. Does Wiz Khalifa have an impairment that makes him sound slow?I agree with you that you have options now. The only option you don't have is to turn back time and be young and stupid again.
With that said, you sound happy. That makes me happy for you:)
Haha.
Oh wait, you are serious…
@slikguy: Sorry, I can't hear you - what with my hearing aid and my crows feet and my high blood pressure. :P
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Offset account.
Sell all the crap you dont need in your life.
Generate additional income by selling the right product on eBay/gumtree.
Stop buying international plane tickets just because they are cheap.