Secrets to owning your own home sooner
Home ownership is one of the cornerstones of adult life in Australia. Knowing that we own a little patch of our country to call our own, and have a permanent roof over our heads, is a great feeling. But one thing that we often forget to think about is that until a mortgage is paid off, we don’t really own a home – effectively, it still belongs to the bank from whom we borrowed.
Interest paid on a home loan is essentially dead money. It doesn’t improve your home; it doesn’t improve your life or the lives of your children. That’s why, where possible, we recommend that you work on paying off your home loan as soon as possible. Once that’s achieved, you’re no longer paying interest to a bank – your money is your own, and so is your home.
But how can you pay off your home loan sooner? There are a couple of basic strategies that we recommend.
1. Make higher repayments
The most obvious way to more quickly pay off a home loan is to pay back larger chunks of it. This not only decreases the amount owing, it also decreases the interest that you pay back – meaning that out of every payment you make, less of it is dead money and more of it is working to pay off the debt.
Let’s look at a fairly common home loan scenario for this area: a $500,000 home with a $300,000 loan. The interest rate on the loan is 6.59%, and the term is a standard 25 years.
Interest payments alone on that $300,000 are $760/fortnight at the start of the loan.
Minimum repayments (paying the interest as well as paying off some of the principle) are $942/fortnight – paying this amount each fortnight will pay off the loan in 25 years.
Paying just $118/fortnight extra – $1060/fortnight – will reduce the loan length to just 19 years and 3 months, and save (over the life of the loan) a whopping $83,394.
2. Buy an investment property
Another option is to leave home loan repayments as they are, and instead put the extra money towards buying an investment property. While this strategy involves more risk, as you’re now juggling two home loans, you can receive not only rent payments to defray repayments, but a capital gain when you sell the investment property at a profit. This capital gain can be fed back into your original home loan, significantly decreasing that debt and bringing you years closer to owning your home.
Consider the above example, where the interest payments alone on a $300,000 home loan are $760/fortnight. If you dropped your minimum repayment down to cover just the interest, and spent the other $300/fortnight on interest-only repayments against a home loan for an investment property, then a $500,000 increase in the value of your investment property over 10 years could get you a capital gain of $500,000 … minus capital gains tax of $125,000, bringing your net gain of $375,000. That’s enough to pay off your initial home loan, with $75,000 extra gained.
Which strategy should I choose?
There is no one strategy that fits all people. We recommend that you talk to a financial advisor to look at your specific circumstances and investment portfolio, and make a decision with their expert guidance.