The problem with your home loan is that you repay the loan after paying tax on your income. This means that borrowing for your home loan is not very efficient from a tax perspective and contributes to the huge amounts of interest you will pay back and often ties you to the home loan for 25 years or more. This of course is very profitable for the banks but not for you!
Do you know that a $500,000 loan over 30 years at 4% interest rate will cost you approx. $359,000 in interest? So, depending on your overall strategy, paying off your home loan faster could be a good thing.
It is generally wise to pay off your non tax deductible debt first and your tax deductible debt last.
The right investment property: one that possesses strong depreciation and, in an area showing strong rental returns, can provide a surplus cash flow. In some cases, from $50 to $400 per week.
You could direct this positive cashflow into your non-tax-deductible home loan instead of your investment loan to take years of your home loan and keep thousands of dollars of interest in your pocket instead.
On the high end, an extra $400 per week could reduce the $500,000 loan above from 30 years to 13 years and reduce the interest from $359,000 to $142,000. What would you do with an extra $217,000 that you did not have to pay in interest? How good would it be to get back 17 years of your life?
On the low end, an extra $100 per week could reduce the $500,000 loan above from 30 years to 22 years and 6 month and reduce the interest from $359,000 to $257,000. What would you do with an extra $102,000 that you did not have to pay in interest? How good would it be to get back 7 years and 6 months of your life back?
Then of course there is the big one. Capital growth in your investment property can be brought back to your home loan. Looking at an example, a $675,900 property held for 10 years on an interest-only loan, enjoying an average 3% growth, would grow in value to $908,353 giving the investor $300,043 in equity. After CGT, and estimates for sales agents fees and solicitors this would leave approx. $199,937 left for you. Could that pay off your home loan in readiness for retirement?
Cash flow positive Investment Property can help pay down your non-tax deductible home loan faster than otherwise possible. The upside is not only can you pay down your home loan faster saving you years and possibly 10’s of thousands in interest, but the right investment property, with the right fundamentals, should grow in value over time providing you a windfall in retirement.
