o This only works if you get paid weekly. If you get paid fortnightly then divide your monthly payment by 2 and pay fortnightly.
o The benefits here are twofold:
- Firstly, the interest on your loan is calculated on the daily balance of your loan, so if you make a payment in week 1 of the month you have reduced your loan balance & hence the interest you pay. The cumulative effect of this is very effective
- Secondly by dividing your normal monthly payment by 4, you are therefore making 52 quarter payments per year, which equates to 13 full payments
o The above point will save you approx 6 – 7 years on your home loan!!!
o This point does not work if you get paid monthly. The whole purpose is to reduce your debt as soon as you get paid. If you get paid monthly and you withhold some of these funds from your loan you are defeating the purpose (unless it is in an offset account – refer the next point)
2. Establish an offset account to your loan
o An offset account is an account in which the balance offsets the balance of your loan. So if you had a $300,000 loan and a savings account with $10,000 in it, you would only pay interest on your loan on the net difference i.e. $290,000. Assuming an interest rate of 6.5% on the loan then this will save you $650 in interest for the year.
o Offset accounts are very effective for your day – day spending account where the balance fluctuates. As an example, on pay day you received $4,000 to your account. This balance immediately starts offsetting the loan in the manner described above (remembering that the interest on your loan balance is calculated daily). During the course of the month, the balance of this account will gradually diminish as you go about your daily life & buy food & clothing, pay your bills & entertain etc.
3. Have your employer split your pay so that your home loan payment is made automatically on the day you are paid
4. Rather than have the exact amount of your payment made to your home loan and the balance to your spending account, work out a budget and have a set amount paid to your savings account with the balance paid to your home loan. This one is subtle but significant.
o By doing the above, each time you receive a pay rise, it will be your home loan that benefits not your spending. Assuming you received a $2,000 a year pay rise, this would equate to approx $40 per week. If this increase was available in your spending account, it would disappear without you realising where it had gone. By structuring your pay in the above manner you will not be tempted to spend this extra money as it would go straight into the loan.
o Remember if you don’t have access to the money your are unlikely to spend it
5. Avoid using the redraw feature of your home loan. If you do use it then make sure that it is for a worthwhile event. i.e. a holiday.
o Bank’s make access to redraw free and easy for a reason. They want you to redraw your loan as they make more interest off it.
6. Make your first loan payment to your loan on the day the loan settles.
o This places your loan one month in advance & means that if you are ever short of funds, the bank won’t notice if you are a few days late making your normal payment.
7. Make extra repayments to your loan whenever possible.
o Deposit your tax refund to your home loan
o If you build up extra funds in your savings account, transfer these to your home loan
Business owners special
o Deposit your GST into an offset account until the end of the quarter when it needs to be paid to the tax office. This way you will be sure to have the money available plus your home loan gets the benefit