Home owners could save up to $50,000 on their mortgages thanks to the stage 3 tax cuts, and experts say using the cash to pay down debt offers a guaranteed return.
By putting next financial year’s tax savings into a home loan in a lump sum payment, a worker on an average income of about $98,000 with a home loan of $500,000 could save $14,344 in interest, the analysis by comparison platform Canstar showed.
Home owners can cut their interest bill by paying their tax cut into their home loan. Credit: Nikki Short
For couples each on the average income the saving was $28,228, but for a couple on a higher income of $150,000 a year each, the saving was $48,161 on a $500,000 loan and $49,501 on a $1 million loan.
“You almost can’t go wrong by putting extra into your loan,” Canstar finance expert Steve Mickenbecker said. “Most loans these days have redraw, and redraw means that if you’ve made extra repayments and you decide you need the money anyway you can pull it back out.”
The analysis was based on a 30-year loan with an average interest rate of 6.87 per cent, and only considered the savings when contributing one year’s worth of tax cuts.
However, if the same extra repayments were applied every year over the life of the loan, the savings for a single mortgagee were more than $117,000 and roughly $196,000 for a couple, 360 Financial Strategists co-founder Billy Amiridis said.
“It reduces your loan balance faster if you put money into your loan or offset account as often as you can,” Amiridis said. “By putting that extra cash you’re saving on tax into your loan, a single person pays it off four years and four months earlier, and for a couple it’s seven years and five months.”
He said those who could afford to should treat that money as though it wasn’t part of their income and avoid “lifestyle creep” – the tendency for people to spend more if they began to earn more.
LBW business and wealth financial adviser Aaron Hitch said another reason people should use their tax saving to bring their interest down was the stubbornly high interest and inflation rates.
“We’ve just seen a spike in inflation, which has prompted more discussion around future interest rate rises,” Hitch said. “So if there was ever a time when people want to pay more off their mortgage, this is it.”
He said that while there may be other ways to invest the extra cash that could yield higher returns, paying down a home loan offered an assured outcome.
“When you compare it to investing, you’re getting a guaranteed outcome – paying money off your mortgage,” he said. “Depending on what your interest rate is, it’s a guaranteed return on your money.”
Amiridis agreed, and both he and Hitch thought it was beneficial to have pay packets directed into a mortgage offset account and to use that account as an everyday bank account.
“An offset account attached to your mortgage makes your money accessible, but it’s still working towards paying down more of the principal of your loan, which brings your interest down over time,” Amiridis said.
Mickenbecker said first home buyers could also benefit from the tax changes, as they would have more borrowing power than before. He said it was important for those who had already been given pre-approval to update their incomes with their banks to reflect the new tax rates.
“If you’re right on the cusp of borrowing right now, your payslips are going to show the old tax rate. Your payslips in three weeks’ time or four weeks’ time will start to show the lower tax rate,” he said. “So you just want to make sure that the bank is factoring in the difference in the two tax levels.”
Along with contributing their take-home top-up to their mortgage, people should also shop around for a better interest rate, Mickenbecker said.
Home owners who avoid ‘lifestyle creep’ will have thousands of dollars extra a year to pay down debt.Credit: Jason South
“People should always look at getting into a lower price loan if they can possibly qualify for one,” he said. “Not everyone can at the moment because they’re doing it tough. But you’re miles ahead if you actually do that and get into a lower interest rate. And if you possibly can continue your repayments at the old rate, then you really do get ahead.”