Debt strategies
Use cashflow effectively to reduce your debt
Use cashflow effectively to reduce your debt
If you are currently spending less than you earn, you could use your surplus cashflow to save on interest and reduce your debt faster.
Home loan interest is usually calculated on the daily balance, even though it may be charged against the loan less frequently.
You can therefore reduce the average daily loan balance and save a considerable amount of interest by:
Jessica and Roger have a home loan of $400,000 and are making repayments of $3,153 per month. Jessica receives a fortnightly salary of $2,700 after tax and Roger earns $1,800 after tax. Their combined living expenses are $5,000 per month (excluding loan repayments).
The following table shows the results from 3 different strategies. These include:
By using the salary crediting strategy, Jessica and Roger could reduce their home loan term by over 5 years and save up to $198,875 in interest. Also, by paying off their home quicker, they’ll build a considerable amount of equity in the family home each year.
Assuming they then wish to build their wealth further, they could use this equity as security for an investment loan. To find out more about borrowing to invest, see Use borrowed money to build wealth.
Loan term | Total interest payments | |
Before strategy | 20 years | $355,988 |
Changing payment frequency | 19 years 2 months | $327,721 |
Increasing regular repayments | 18 years 8 months | $317,021 |
Salary crediting | 9 years and 10 months | $157,113 |
* Assumptions: The home loan interest rate is 7.5% pa. The home loan term is 20 years. Jessica and Roger earn annual pre-tax salaries of $94,850 and $58,550 respectively. Salaries and combined living expenses are increased by 3% pa.
Check out these other debt strategies to help you save money and build wealth:
Your Westlawn Wealth Adviser can help you assess all the issues that need to be considered and determine whether and how you could use your cashflow to pay off your home loan faster.
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This publication has been prepared by GWM Adviser Services Limited (ABN 96 002 071 749, AFSL 230692) (‘GWMAS’), a member of the National Australia Bank group of companies (‘NAB Group’), 105–153 Miller Street, North Sydney 2060. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information. Information in this publication is accurate as at 1 February 2017. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither GWMAS nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy, accept any responsibility for errors or omissions in this document. The case study in this publication is for illustration purposes only. The investment returns shown in the case study are hypothetical examples only and do not reflect the historical or future returns of any specific financial products. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.
Liz Maroney and Westlawn Wealth Management Pty Ltd ABN 32 124 861 409, Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749, Australian Financial Services Licensee, 105 -153 Miller Street North Sydney NSW 2060.