by Greg Carroll at www.attitudefinance.com

There is no doubt there are a number economic factors going on at the moment that are outside all of our control. And while it is easy to dwell on these factors I'd prefer to focus my attention on the things that can be controlled. So today I'd like to look at a number of strategies that you may be able to use to offset some of the rising living costs.

Knock $400 a month off your home loan repayments

Imagine if you could save $400 a month in expenses. Would it make a difference? That's $4,800 a year. That might cover school fees, offset the cost of petrol, help with the groceries or cover an end of year holiday. And depending on your situation you may be able to make a bigger saving. I'll use an example to illustrate.

Michael and Sandra's home loan is $300,000 and is 5 years into its term. Their current rate is 9% and their repayments are $2,517. By simply restructuring their loan over 30 years and keeping the same rate they can reduce their repayments to $2,414 a month.

Not a bad start but they can go further. Through another lender I use they are able to access a lower rate of 8.46%. Through a restructure they are now able to reduce their payments to $2,298 per month.

A bit more of a saving but they can go one step further. If they also put their lending on interest only for a period they could reduce their monthly commitment to $2,115 per month. A saving of $402 a month.

With most interest only loans you can still make additional reductions at any time. So you could still tip extra into the loan. But on those months when all your expenses seem to hit at once you can just pay the interest. So you have not only reduced your expenses but have added some flexibility.

 If you would like more information on this loan contact me on 07 3666 0110 or contact us

And maybe a bit more

If Michael and Sandra had a credit card for $10,000 which was costing them around $250 a month they could also roll this into the loan which would reduce the commitment to $70 per month. Therefore a total saving of $582 a month.

Rolling cards into a home loan turns a short term debt into a long term debt but if you have been trying to reduce your card for a while and not making any headway then it is probably worth looking at. If you do go down this path I would still suggest implementing a reduction programme for this portion of the debt. For example on a rate of 8.46% with a repayment of $250 per month it would be possible to pay off a $10,000 debt in approximately 4 years.

You need to weigh it up

There is no doubt there are pros and cons with debt consolidation and switching to interest only but if you are seriously finding it tight particularly in light of the other cost pressures then it is worth reviewing your position. 

The recent changes to stamp duty announced by the State Government will also offset some of the switching costs.

Investors also have some more options up their sleeves

For investors the early period of holding a property can place some pressure on cashflow particularly with the current rate increases.

There are however a number of strategies that can be adopted to minimise the impact on cash flow. In fact in may even be possible for investors to accelerate the reduction of their home loan debt in the process. Let's look at an example.

Bill and Lori Jones are planning to purchase an investment property for $350,000. Their home is currently worth $600,000 with a home loan of $252,000. Estimated purchase costs are $14,214. Starting rental is $310/week. Average annual growth is 7%. Bills earns $85,000 pa and Lori $25,000. Their living expenses are $1,000 per week.

A possible way for Bill and Lori to structure this purchase is as follows:

TABLE 1

Under this structure:

·         They are still financing 100% of the purchase price plus costs, maximising their tax deductions ($84,615 + $280,000 = $364,615).

·         They are separating each property so they are not cross-securitised. This means in the future they can refinance or sell one of the properties without affecting the other and avoid potentially higher costs.

·         They have provided themselves a buffer of $143,385 to assist with funding the investment property.

So that is a good start but here is where Bill and Lori can really turn this structure to their advantage:

• Bill and Lori direct all their income into the $252,000 home loan split
• They also direct the rental income from the investment property into the home loan split
• Because they will have losses against their property this can be offset against income which should see them receive a tax refund. This refund is directed into their home loan.
• The interest payments for the Investment Loan are paid from the Investment Split
• The Investment property expenses are paid from the Investment Split
• Investment property expenses are paid from Line of Credit
• Bill and Lori pay their personal living expense $1,000 a week from their Home Loan Split

So what affect does this have?

• It means Bill and Lori are channelling more money into their home loan
• The more they can pay in and the longer they can leave it in their home loan the less home loan interest they will be charged
• Therefore over time it will go down
• Because no funds are be paid into the investment split it will increase. The debt on this investment split will be tax-deductible

Let's have a look at TABLE 2 below to see the result in more detail:

TABLE 2

So in just over 5 years Bill and Lori have shifted their non-deductible home loan across to the deductible side of the ledger. This is possible under a particular structure called Global Facility Limit structure.

Based on the above assumptions the investment property would be worth $490,893 and their own home would be $841,531. A total of $1,332,424. Their total debt is $306,998 plus the investment loan $280,000 - $586,998. Giving them a net worth of $745,426.

Interestingly if they had not purchased the investment property and instead paid all their surplus income after living expenses into their home loan each month it would take them approximately 17 years to pay off their home loan. 

Used with good budget discipline it can be a highly effective wealth creation tool. This is an option that many investors would be able to utilise. Will it work for you? That really depends on your specific circumstances. The best way to find out is to contact us for an initial discussion.

If you would like to look at some scenarios for your own situation then contact us or phone 07 3666 0110 

This information is not a substitute for independent professional advice. We do not warrant the accuracy, completeness or adequacy of the information or material in this article. All information is subject to change without notice. We and each party providing material displayed in this article disclaim liability to all persons or organizations in relation to any action(s) taken on the basis of currency or accuracy of the information or material, or any loss or damage suffered in connection with that information or material. You should make your own enquiries in relation to tax, risk and your personal situation before entering into any transaction on the basis of the information or material in this article.