Saving $400,000 worth of interest on a $800,000 home loan, seems like an interesting notion . Using a simple straight forward example, I will try and lay out the best strategy for the deep thinker.
The setup
Imagine a couple with $800,000 remaining on their home loan, they have a taxable income of $210k together and household expenses of $120k including the home loan repayments at 5.5%($54k)
If this couple spend an extra $1,292 per fortnight towards additional repayments they would save nearly 17 years off the term of their home loan. Not to mention half a million in interest.
Is this realistic?
No, because life. Life comes up, so to plan we have to dig a little deeper. There are always additional costs that seem to come up. The good thing is we can actually be more realistic and include them in our budget. Cars and holidays shouldn’t surprise anyone, they do need to get updated. Luckily there are tools which can be used to do a deep dive into your current spending habits like pocketsmith. We currently use Planolitix to lay out lump sums in the future.
We can also include school costs as children grow up, and possible increases in income.
So how do I approach this smartly?
Throwing in some more lumpy expenses into the future we get a little less impressive outcome. However saving $400,000 in interest is still worth considering.
Of course to enable those lumpy expenses like holidays and car purchases, it would be prudent to stick to a budget say of the original $1,292 per fortnight in additional repayments. But to redirect that to flexible home loan products like offset or revolving credit. This will enable you to build that buffer inside the home loan which saves you interest. Whilst still being able to withdraw back repayments to complete larger purchases.
For a detailed look at your own situation feel free to check out our tailormade planning options.
