As the clock struck midnight on New Year’s Day around two-thirds of Australians made financial resolutions – and our home loans could hold the key to making them happen.
Research BY ING Direct reveals that 66 percent of Australians made resolutions for 2012. Money management dominates plans for the year ahead, with 34 percent resolving to save more and 24 percent planning to cut back debt. The good news is that a home loan can help you achieve both.
Develop a savings target
First up, let’s look at the savings side. All financial goals work best when they involve a specific target, so aiming to save $50 each week is far more concrete than simply aiming to ‘save more’. Revisiting your household spending budget – or reviewing your credit card statements, will show where spending can be cut back to generate savings.
Next, look at where those savings should be invested for maximum gain. That’s where your home loan comes in. Storing your savings in a high interest savings account can mean earning interest of 5.5 percent to 6.0 percent. However after inflation (currently 3.5 percent) and income tax you could be earning a ‘real’ return below 2 percent
By contrast, your home is a tax-free asset, and while channeling your spare cash into your loan won’t generate interest income it will produce valuable reductions in interest costs. Tipping savings into a loan with a rate of 7 percent is the equivalent of earning 7 percent after tax. A high income earner on the top personal rate of tax would need to find an investment paying a return of at least 13 percent to achieve the same result.
Achieve two goals in one shot
The great thing about directing surplus cash into your home loan is that you simultaneously achieve the second goal of reducing debt. Depositing an extra $50 each week into a $300,000 mortgage charging 7 percent could see you save up to $81,000 in overall interest and be mortgage free five years sooner.
Use redraw sparingly
Many of today’s mortgages offer redraw facilities that let you access extra repayments if the cash is needed in an emergency. Arranging a redraw may take time though this isn’t necessarily a bad thing as it forces us to consider whether we really need to make the withdrawal. Clawing money back out of your loan will water down the long term interest savings but it is still a lot cheaper than using a high interest credit card.
As an extra plus, using your home loan as a savings vehicle means bypassing the need to open a new savings account or deal with multiple statements. It’s certainly a strategy worth thinking about to kick some financial goals in 2012.