Using Investments To Pay Off The Home Loan Quicker
Most home owners with a mortgage would like to own their home debt-free as quickly as possible. However most people do nothing beyond making the minimum repayments over the life of the loan. Some will make sacrifices to their lifestyles in order to contribute more on their monthly repayments, foregoing the family holiday, new car or kitchen renovation.
Those in the know will use a property investment strategy to pay down the home loan faster, sometimes reducing the time left by half.
Here’s a quick example:
Let’s say you have refinanced the balance of your home loan (your principal place of residence) of $300,000. On a variable loan of 6.25% over 20 years, your monthly repayments will be $2,203. Initially, most of that will be servicing the interest with only about a third going towards reducing the principal.
At the same time, let’s say you’ve picked up a brand-new investment property valued at $650,000 exclusive of stamp duty, legal fees, etc. This loan is interest only at 6.5% for the next 5 years. Your monthly out-of-pocket for this investment will be $800.
At Pillar Financial, we always recommend paying down personal debt (often known as ‘bad debt’) first as this type of debt typically offers no real benefits.
Now, let’s assume the new investment property is giving you an ‘average’ tax credit every year of $11,000 for the next ten years. Essentially, you have now redirected $111,000 away from the ATO and made it work for you by way of incentivised investment (and generated potential capital growth you could receive from the investment property).
If your new investment property were to grow in value over the next ten years by a modest 6% compounding annually, you could have up to $130,000 or more of additional ‘usable’ equity you could tap into and put it towards your personal home loan. Thus bringing forward the time it will take you to own your home outright by five-six years or more. The smart use of credit cards and offset accounts can further help you pay down your home loan faster.
Over the ownership of the investment property, you will need to renew your Interest Only home loan in order to keep the focus on paying down your personal home loan, and there are other mitigating factors, but you can see with the above example how effective this strategy can be.
Note: The above example has been simplified in order to demonstrate a possible strategy. There are multiple steps involved in setting up and monitoring this type of strategy. Interest rate changes, vacancy rates, personal incomes, additional repayments and property growth rates can all affect the overall outcome.