Low interest rates! Let me say it again…low interest rates! Actually, that sentence should end with…equal a wealth of financial opportunity!
Never before in the history of our young nation have we been afforded such an incredible chance to pay down non-tax deductible debt and potentially save thousands and years off our mortgages.
Not only are there savings to be had due to the simple fact that the Reserve Bank has maintained such a consistently, record breaking low cash rate for the past two plus years.
But if you also take just two extra, easy steps as a homeowner, the financial benefits can be even more substantial. In fact, you could find yourself with enough spare change to invest in a high growth property portfolio.
Step 1. Try to make it more regular.
Don’t worry, I’m not becoming overly familiar with you and your personal, errr, physiological functioning…I’m actually talking about the regularity of your home loan repayments.
The financial benefit of increasing the frequency of your mortgage repayments from monthly to fortnightly can be quite compelling when you crunch the numbers.
By halving your monthly loan repayment into fortnightly instalments, you in effect make 13 monthly repayments instead of 12 over the course of a year.
In other words, if your monthly obligation to the banks was say $2300 and you opted to pay half this amount ($1150 per fortnight), you’d end up repaying $29,900 over 12 months as opposed to $27,600 with the minimum monthly amount.
Making what is essentially the equivalent of one extra repayment per annum in this fashion will not only reduce the term of your loan, but also the total interest payable over its life.
Step 2. Pay a bit extra!
Now consider the savings you could enjoy if you not only opted to make fortnightly repayments, but also made repayments at above the required level while interest rates remain so accommodatingly low.
Taking the above example, if you continued to pay $1150 per fortnight on your mortgage ($2300 per month), even though a drop in rates reduced your repayments to say $1100 per fortnight ($2200 per month), you’d be shaving an additional $1300 off your non-tax deductible home loan debt every year.
While these numbers are compelling enough, let’s take a bigger picture perspective over the life of say a 25-year loan of $500,000 at an interest rate of 7 per cent (the industry standard for credit assessment). This is where the difference these two simple steps can make becomes even more apparent.
If you were to pay just $60 extra each month, your total outlay over the life of a $500,000 loan (with interest) would be reduced from $1,060,147 to $1,031,230…that’s close to $30,000 in your pocket, instead of the banks!
Think of the future
Now, what if you took all that extra capital you saved by using these two simple steps, and put it to good use in order to build a secure future fund?
By saving money on your mortgage you are, in fact, manufacturing equity and reducing your debt exposure. This makes you a better credit prospect for lenders and also means you could conceivably end up with enough surplus cashflow to build a high growth property portfolio.
This is a particularly good strategy when housing markets stagnate, because it means you can continue to grow your portfolio’s equity, even if property values are not moving much.
You’re also building an additional cashflow buffer that you can turn to should your investment income drop off for any reason. This will enable you to maintain your mortgage repayments when interest rates rise eventually, meaning the extra time and savings you buy yourself now by paying more than you have to, will continue to work in your financial favour.
Homeowners and investors would be wise to take advantage of the current low interest rate climate to generate equity and cashflow buffers that they might not otherwise gain through natural market movement.
Take stock, get ahead of the game and set yourself up for the next rainy day, because you never know when those storm clouds might roll in.
If you would like to know how you can personally take advantage of the current climate to set yourself up for a brighter financial future, why not connect with the team at Trilogy Funding?
Click here to arrange a one-on-one consultation with one of our expert financial consultants today.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).