Building Wealth through Mortgage Reduction
When purchasing property it is the norm for a person or couple to approach a bank or lending institution to apply for a loan to assist them in owning their own home. A loan is a sum of money that is borrowed from a business or institution with contractual agreement to pay back the borrowed amount with interest. In todays market we have moved past the standard borrowing "bank only" option of fixed or variable rates and have many options available to us to secure and repay a loan over a set number of years. Property Investors have indeed become quite affluent in building wealth through property accumulation. Lets start with the basic of home loan lending.
Principal & Interest or Home Loans
This Principal and Interest (P/I) is a typical loan taken out by most borrowers to pay off their homes. As Generally loans are term payment loans, meaning fixed monthly amounts over a fixed time. A x B = C (C = P & I). The term of the repayment of the loan is usually between 25-30 years.
Interest Only Loan Home Loans
This loan is commonly used for investment properties, as the interest portion of the loan is tax deductable. Using an interest only loan to pay off your home is not tax deductable but saves years in repayments and interest, provided you pay the same repayment as a P/I loan during the loan period.
For example if your home loan was interest only (I/O) and you paid the same repayment as you do now with your principle and interest loan, you would reduce the time period of your mortgage from 30 to 22 years. This is a saving of 8 years and over $200,000 in repayments and interest. This formula will require financial discipline and the correct loan structure to achieve the desired results. For most people when this is explained to them for the first time cannot believe it is actually possible or true. It is possible and it is true!
A redraw facility allows you to make extra payments and than withdraw them if you need, keeping in mind you can only redraw extra payments you make. It means you can put all your ‘rainy day' money into your mortgage, knowing that you can get it out again if you have to, or alternatively you can use it to save money for a specific purpose, such as a car.
Competitively priced loans with redraw facilities are increasingly common, but you may still end up paying more, so make sure it is set up correctly to avoid disappointment. Points to note with some redraw facilities are:
Always consider how often you would like to ‘redraw' your money first before deciding whether this feature suits you.
A line of credit is really like a giant credit card secured against your home, and not like a standard home loan. You get a limit and so long as you pay the interest charged, you may pay off as much or as little of what you borrowed as you like. You could bank all your pay into this account, like a mortgage offset. Generally, lines of credit:
If you already have problems with your credit card, or if you think it will be hard for you not to dip into your line of credit for daily living or luxuries, then a line of credit will certainly not suit you. It requires discipline when it comes to extra spending.
An offset account for a home loan is a simple feature that enables you to pay off your loan sooner without even thinking about it, allowing savings in other accounts to offset interest payments.
Basically, your mortgage is linked to a savings account into which your salary and other cash can be deposited and from which you withdraw to pay bills, credit card etc, when these debts become due. For as long as money sits in the account, it is 'offset' against your home loan and reduces your interest bill.
With an offset account lenders will charge you interest on the balance of your home loan less the balance of your offset account. These types of loans can also have a regular cheque account that has ATM, chequebook and Internet access linked to your home loan when it is setup.
The benefits of choosing an offset home loan are that the interest rate return on savings is far lower than the interest the bank is charging you on your home loan. So instead of earning interest on the money in your savings account, you are saving far more from the interest reduced on your home loan. Ultimately the more money you have in your offset home loan account the les interest you will pay on your mortgage, therefore reducing the repayments and the years taken to own your property.
Make sure that whatever loan you choose to go with, it is best suited to your needs and type of property, whether a principal place of residence (PPR) or an investment property (IP). The banks will asses your and partners (if applicable) income, current assets, liabilities, your ability to pay back the loan, the security of the property and the Loan to Value Ration (LVR). If the aim is to reduce your mortgage repayments, thereofre saving more money than you could earn in a term deposit and build wealth, than I suggest you seek advice from experienced industry professionals.
Jewel Investment Properties has a team of experienced and knowledgeable consultants that can show you how to save money on your mortgage and build wealth through property investment. Learn the secrets the banks don't want you to know and slash years of your lending and interest repayments.
Download our free eBook online at www.jewelinvestments.com.au to learn more.
Principal & Interest or Home Loans
This Principal and Interest (P/I) is a typical loan taken out by most borrowers to pay off their homes. As Generally loans are term payment loans, meaning fixed monthly amounts over a fixed time. A x B = C (C = P & I). The term of the repayment of the loan is usually between 25-30 years.
Interest Only Loan Home Loans
This loan is commonly used for investment properties, as the interest portion of the loan is tax deductable. Using an interest only loan to pay off your home is not tax deductable but saves years in repayments and interest, provided you pay the same repayment as a P/I loan during the loan period.
For example if your home loan was interest only (I/O) and you paid the same repayment as you do now with your principle and interest loan, you would reduce the time period of your mortgage from 30 to 22 years. This is a saving of 8 years and over $200,000 in repayments and interest. This formula will require financial discipline and the correct loan structure to achieve the desired results. For most people when this is explained to them for the first time cannot believe it is actually possible or true. It is possible and it is true!
Redraw Facility Loan
A redraw facility allows you to make extra payments and than withdraw them if you need, keeping in mind you can only redraw extra payments you make. It means you can put all your ‘rainy day' money into your mortgage, knowing that you can get it out again if you have to, or alternatively you can use it to save money for a specific purpose, such as a car.
Competitively priced loans with redraw facilities are increasingly common, but you may still end up paying more, so make sure it is set up correctly to avoid disappointment. Points to note with some redraw facilities are:
- Being charged a fee for each redraw
- A set minimum amount for each redraw
- A limited number of redraws per year
Always consider how often you would like to ‘redraw' your money first before deciding whether this feature suits you.
Line of Credit Loan
A line of credit is really like a giant credit card secured against your home, and not like a standard home loan. You get a limit and so long as you pay the interest charged, you may pay off as much or as little of what you borrowed as you like. You could bank all your pay into this account, like a mortgage offset. Generally, lines of credit:
- Charge a higher rate of interest than a standard loan
- May charge a fee to operate
- Credit your loan with the full interest you pay
If you already have problems with your credit card, or if you think it will be hard for you not to dip into your line of credit for daily living or luxuries, then a line of credit will certainly not suit you. It requires discipline when it comes to extra spending.
A 100% (true) Offset Loan
An offset account for a home loan is a simple feature that enables you to pay off your loan sooner without even thinking about it, allowing savings in other accounts to offset interest payments.
Basically, your mortgage is linked to a savings account into which your salary and other cash can be deposited and from which you withdraw to pay bills, credit card etc, when these debts become due. For as long as money sits in the account, it is 'offset' against your home loan and reduces your interest bill.
With an offset account lenders will charge you interest on the balance of your home loan less the balance of your offset account. These types of loans can also have a regular cheque account that has ATM, chequebook and Internet access linked to your home loan when it is setup.
The benefits of choosing an offset home loan are that the interest rate return on savings is far lower than the interest the bank is charging you on your home loan. So instead of earning interest on the money in your savings account, you are saving far more from the interest reduced on your home loan. Ultimately the more money you have in your offset home loan account the les interest you will pay on your mortgage, therefore reducing the repayments and the years taken to own your property.
What Home Loan should you choose?
Make sure that whatever loan you choose to go with, it is best suited to your needs and type of property, whether a principal place of residence (PPR) or an investment property (IP). The banks will asses your and partners (if applicable) income, current assets, liabilities, your ability to pay back the loan, the security of the property and the Loan to Value Ration (LVR). If the aim is to reduce your mortgage repayments, thereofre saving more money than you could earn in a term deposit and build wealth, than I suggest you seek advice from experienced industry professionals.
Jewel Investment Properties has a team of experienced and knowledgeable consultants that can show you how to save money on your mortgage and build wealth through property investment. Learn the secrets the banks don't want you to know and slash years of your lending and interest repayments.
Download our free eBook online at www.jewelinvestments.com.au to learn more.