Since the shock of the GFC, Australians have been focussing on paying off their debts (particularly their home loans) as a strategy to increase their financial security. This strategy has been assisted by the falling interest rates where borrowers have kept their repayments at the original level.
Of course (as a side note), this is precisely what the Reserve Bank don’t want. They would prefer that you make minimum loan repayments and spend the rest to stimulate the economy. Good for the economy, maybe not so good for you.
In general, repaying faster is a sensible strategy but there are ways to turbo-charge the process and combining this strategy with an overall financial plan will help you build a secure financial future.
The first step (as always) is to prepare a budget. Controlling your existing cash flow will help you achieve your financial goals sooner. Think of the budget as a reality check and an opportunity to change reality.
You also need to review your overall debt situation and the structure of your existing loans. Maybe there is an opportunity to restructure your loans to refinance existing (higher interest) debt into your home loan to save interest. But also consider the type of home loan.
Some of our clients are achieving great results by utilising interest only home loans combined with an offset account. For this to work, you need to be disciplined and make sure that the full repayments are made into the offset account and stay there. Any additional savings should also be left in the offset account as the home loan interest saved will be much higher than interest you may earn on a savings account.
Consider making loan repayments as frequently as you get paid. For example, if you are paid weekly and your repayments are $1,000 per month, pay $231 (always round up) weekly.
As your debt decreases, consider using the increasing equity to finance the purchase of an income producing asset (typically, real estate or shares). Properly structured, this can assist in increasing your net asset position and isn’t that what we want?
So, getting your home loan under control as quickly as possible will give you more options to build a stronger financial future. This doesn’t have to be a painful process and the rewards will be significant.
Now, before I finish off for this week, I need to emphasise that any financial advice above is general advice only and may not be the best advice for your particular situation. Although I am qualified to provide this advice, I can only do that after a detailed assessment of your financial position.