Do you know that a higher interest rate loan that is well structured can save you much more than a seemingly low-interest rate loan over its full term?
You are not alone when it comes to falling for the well-oiled home loan options that seem too good to be true. Indeed, a well-planned property purchase is an invaluable asset, but only if you are able to actually own the house in good time.Simply by understanding the structure of your home loan better, it is possible to own your home much sooner and save thousands over the life of your loan.
Here are 5 points to earn more from your property by saving precious bucks on your home loan
1. Interest only loans – Investors can take advantage of several tax deductions on their investment property including interest payments on their home loan. An interest only loan is a good option for investors, translating into smaller repayments and greater flexibility for further investments.
While the interest paid is tax deductible, the principal amount can be used towards paying off the non-tax deductible mortgage on your own home.
2. Save more with an offset account – Having an offset account linked to your home loan is one of the best strategies to get the max from your home loan. An offset account gives you better incentive to save for a rainy day as well as save more on a daily basis.
Money in an offset account is deducted from your principal and you only pay interest on the remaining loan amount.
Take Ann’s case for example. She took a home loan of $250,000 and has an offset account linked to it. Using the offset account as a long-term savings account, she has saved $50,000 in it. This means, she only pays interest on $200,000, which is a substantial saving.
Further, she receives her salary in the same account and being a disciplined person, she uses her credit card for her monthly purchases, sticking to a strict budget. This ensures she pays even lesser interest on her home loan each month.
Ann is really savvy with her money and knows how to manage plastic money without running into debts. Unless you follow strict financial discipline, it is better to use your offset account only as a savings account and not fall into the trap of using credit cards for your monthly expenditure.
Tip: It is possible to save much more with an interest only loan linked to an offset account.
3. Fixed or variable – Choosing between a fixed or variable loan is a tough decision. With current interest rates at an all-time low, the temptation is massive to lock in a fixed rate.
While a variable rate lets you ride the highs and lows in the market, a fixed rate (that also turns variable after a fixed period of time) gives you security and ensures better financial planning as you know exactly how much you’d be paying for the next few years.
Another option could be to take the middle path, that is, partly fix your loan and benefit from both the worlds i.e Splitting your home loan. This choice eventually depends on your financial vision and appetite for risk.
4. Additional repayments – Making additional repayments into your home loan will ensure you own your home much sooner and pay lesser interest over the life of the loan.
Additional repayments help borrowers by reducing the principal amount, consequently reducing the interest payable as well.
A little bit of planning can go a long way in paying off your loan early. Opt for a loan structure that allows for additional repayments at no cost. You can pay your yearly bonus or any gift money you receive directly into your home loan or make an extra repayment yearly and reduce your debt at a faster rate.
5. Avoid cross-collateralization – Using more than one property to secure a home loan or multiple home loans can have you stranded in a web of entangled securities.
Apart from limited access to equity and loss of control over sales proceeds, a cross-collateralized portfolio gives lenders greater control over your assets. Cross-collateralization will also affect your borrowing capacity in the future. In case you plan to refinance to a lower rate or switch lenders, the whole portfolio will be revalued by the lender and under-performing properties will negate the growth of the well-performing ones. The cost of switching is also higher for cross-collateralized portfolios due to the sheer number of properties involved.
As the market teems with lowest interest rates in a long time, it may be the right time to plunge in the property market. Compare home loan rates online to pick the lowest rates in the market. However, keep in mind that cheapest isn’t always the best. Look for additional features in a home loan deal to save much more over the life of the loan.
By Vidhu Bajaj