Making your first home work for you
MOST Australians begin their journey to wealth by buying their first home.
It’s a simple strategy, but can give rise to a whole host of dilemmas such as what sort of loan to take, how fast should the house be paid off, and is it wise to diversify and invest elsewhere before your loan is paid off?
Keep in mind two fundamental principals. For tax purposes you should try to minimise your non-deductible debt and maximise your deductible debt - for wealth creation purposes you should be trying to control as many assets as you can afford in order to maximise your chances of capital gain.
Now let’s explore the options available to a couple who have just bought their first home and have taken out the average mortgage of $360,000.
It may well be a struggle in the early years and to ease the pressure they may start their repayments on a 30 year term which would be $2396 a month if rates are 7 per cent.
The problem with these low repayments is that they will be paying back $502,000 in interest if they don’t increase them as time goes by.
Because of the long loan term they will have compound interest working against them, instead of for them, and after ten long years of repayments of $2396 a month will have reduced their debt by just $51,000 to $309,000. Shocking isn’t it? They will have paid $287,000 in payments but the bulk of the money, $236,000, has gone to the bank for interest.
An easy way to reduce this horrendous sum is to pay half the monthly loan repayment on a fortnightly basis. They won’t feel any extra strain if they pay back $1198 a fortnight, especially if they are paid fortnightly, but because there are 26 fortnights and 12 calendar months, they will be making the equivalent of an extra payment which will go straight to reducing the principal. Just this one simple act will reduce the term to 24 years and save them $123,000 in interest.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.