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Looking for ways to pay off your mortgage in record time? Whether you’re a seasoned investor or buying your first home, an offset loan can help you reduce interest payments, save on tax and pay your mortgage off years ahead of schedule.

What is an offset loan?

With an offset loan (also called an offset account, interest offset account, mortgage offset account or offset home loan) the borrower takes out a home loan and opens a linked savings or transaction account. The balance in the savings account is then ‘offset’ daily against the home loan.

How an offset loan works

With an offset loan, instead of receiving interest on your savings account each month, the account balance is offset against your home loan, reducing the amount of interest you pay over the life of the loan. For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your home loan is calculated on $380,000 instead of $400,000.

While your repayments remain the same, you’re paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan.

For home owners, another potential benefit is that the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, which means you may not have to pay tax on any interest earned on your savings. Seek advice from an accountant or financial planner on the tax implications of an offset account.

Getting maximum benefit from an offset loan

Because your mortgage interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan. You can still access the money in your offset account online or with an ATM card, but because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible.

Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you’re not a disciplined spender you may end up incurring interest charges and cancelling out the savings benefit.

What you need to know about offset loans

An offset account is identical to any other savings account with a bank card and online access, so you can withdraw your money at any time. In most cases the offset is tax free (but do consult your tax accountant) Most offset accounts are offered with variable rate loans, however some lenders offer offset accounts on fixed rate loans, too.

The upshot?

Many borrowers could benefit from having an offset account, particularly if you plan on refinancing or moving home in the near future. It’s worth talking to your broker to find out more about the best option for your circumstances.

Happy reading - and feel free to share with anyone who may find this info useful.

Jamie

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If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. 



 

The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.

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It’s all too easy to rack up debt – credit cards, HECS, car loans – and may seem all too hard to pay it off. Debt can also have a big impact on how much money you can borrow for a home loan, so reducing your debt is essential when you set out to buy your first home.

Here are seven steps you can take towards minimising your debt and moving into the property market.

1. Work out how much you’re spending

Create a spreadsheet and track your expenses for a month – record everything so you can see where your money is going. You may be spending much more than you think on some things – more than you can really afford.

2. Decide where you can cut back

With a clear idea of how much you spend each month, you can figure out how much you really need to spend, and where you can cut back. That second coffee every day could be costing you $20 a week – that’s $1,000 a year. Buying your lunch rather than bringing it could cost you $2,500 a year. Buying one less bottle of wine a week could save you another $1,200 a year. With a bit of commitment, you can rein in your spending and have more money to repay debt.

3. Make a budget

The only way to get on top of your credit cards is to stop using them. Make a budget for the money you need to spend each week or fortnight, based on how much money is coming in and what your necessary expenses are, and stick to it. Calculate how much is left over after you’ve paid for the necessities, then figure out how much you want for discretionary spending and how much you can put towards repaying debt. Also, put money into a contingency fund to cover unexpected expenses such as car repairs that could bust your budget and cause you to reach for the credit card.

4. Prioritise your debt

Work out how much money you actually owe on credit cards and loans – you may not realise how much it is. When you know how much debt you’re in, you can think more realistically about repaying it. You need to pay at least the minimum amount due on all credit cards each month to avoid going backwards and in some cases being charged fees and penalties. But by paying only the minimum, you may never get the cards paid off; you need to pay more to make progress.

Consider:

paying high interest credit cards and loans first to save on interest

paying smaller debts first to give you the sense that you’re getting ahead, and that paying off debt is possible.

5. Make a repayment plan

Armed with your budget and having worked out your debt priorities, you can plan which debts you will pay off over what period of time. Having a plan will increase your sense of control over your debt; sticking to it will increase your sense of achievement.

6. Set goals and celebrate them

The thought of paying off all your debt may seem daunting, so breaking it down into milestones will help you see the way ahead. Set goals such as paying off 10%, then paying off 25% and so on. Remember to celebrate each time you reach a milestone – buy yourself lunch or go to a movie as a small reward for your achievement.

7. Stick to the plan – and ride out the setbacks 

Keep going with your repayment plan. If you miss a payment because of an unforeseen expense, stay positive. Avoid feeling demoralised or derailed by looking forward to the next debt milestone – you can get there.

Happy reading - and feel free to share with anyone who may find this info useful.

Jamie

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If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. 



The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.

 

 

Published in Blog Post

If you’re reading this and about to go on maternity leave (or are already on it) – congrats! It’s an exciting time.

We get quite a lot of new enquiries from clients who have just been declined from their current lender due to being on maternity leave.

It’s a frustrating situation – some have been saving up a deposit for a long time and are excited about finally purchasing a home. Others have decided it’s time to upgrade into something larger to accommodate the growing family – or simply want to release some equity to pay for renovations.

From the lenders perspective, some will argue that there’s no guarantee the client will return to the workforce and therefore the application is considered high risk.

The good news is that some lenders are more receptive to lending to clients on maternity leave. They won’t simply base their assessment on your current financial situation (which usually involves a period of reduced household income) but will also look at your borrowing capacity based on your return to work income.

Providing you have enough savings (or other liquid assets such as shares) to cover any shortfall in income during the period of maternity leave - some banks will take into account your return to work income when assessing your borrowing capacity.

How long can you be on maternity leave for? From the banks perspective -  it’s generally a maximum period of 12 months but the shorter the period the more favourably the application will be looked at.

What do you need to show the bank? It’s the same requirements as any other application – you need to provide payslips as well as a letter from your employer stating the terms of your maternity leave, your return to work date, tenure when you return (part time or full time) and the salary you will earn. You will also need to show proof of savings/assets.

What’s the maximum Loan to Value Ratio (LVR) you can borrow up to? As a general rule – it’s best to aim to borrow no more than 80% of the property’s value. Technically it’s possible to go beyond 80% (up to 90%) - but when mortgage insurance is involved, it adds a further layer of scrutiny to the application.

Does the purchase have to be for an owner occupied property or can it be for an investment? It can be for either. We’ve had loans approved for both.

With all that said – it’s hugely important that the borrower is comfortable with taking on additional debt. Whilst the thought of a new home, investment property or upgrading is exciting – overstretching yourself and ending up in financial hardship isn’t! So whilst the bank might be willing to provide you with a loan it’s important that you’ve also crunched the household budget and are reasonably certain that you can afford to take on the additional debt.

When crunching the numbers, it’s important to base your loan repayments on a higher rate (around the 7% mark) so you can be confident that you’ll be able to meet your repayments when rates eventually start heading back up. Also factor in expenses relating to your new bub – they can be very expensive!

All in all, being on maternity leave doesn’t preclude you from borrowing. It’s just a matter of working with a lender that’s policies are conducive to your requirements and presenting the strongest application you can.

If you need assistance with getting a loan approved whilst on maternity leave, feel free to get in touch with us.

Jamie 

About the author: Jamie Moore is an active residential property investor and owner of Pass Go Home Loans. If you’d like to have Jamie provide advice on your finance structure and investment strategy, simply complete and return this FORM and he will be in touch - this is a FREE, no obligation service. This information is of a general nature – please always consult taxation professionals about the specific nature of your situation.

Pass Go Home Loans Pty Ltd
Australia Wide Mortgage Broker
This email address is being protected from spambots. You need JavaScript enabled to view it. | www.passgo.com.au | 1300 656 299

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