With the end of the financial year near at hand, it’s time to think about how you plan to spend your tax refund for 2012/2013.
When you start thinking about ways to get rid of those dollars from the ATO, new clothes or a new laptop obviously sound very appealing. But if you really want to get the most out of your tax refund, it pays to look a little closer to home – literally.
Putting your refund towards your mortgage may not sound very exciting, but it could save you thousands of dollars in the long term, as well as bring you one step closer to owning your own home outright.
If you’re still not convinced, you might be surprised by how much you can actually save!
Small steps, big savings
When you take out a home loan, you will have to pay interest on the total amount borrowed or the total value of the loan. How much interest you pay over the life of the loan will ultimately depend on the size of the loan, as well as the interest rate.
While I’m sure this is hardly surprising, what may shock you is exactly how much this interest adds up to over a period of 25 years.
For instance, a borrower who takes on a home loan of $300,000, with a standard variable interest rate of 6.15%, will pay $288,151 in interest over the life of the loan – that’s nearly as much as the principal sum itself!
There is only one way to avoid paying that much and that is to drive down the mortgage with additional repayments.
Using your tax refund to drive down the amount owing on your mortgage can be a powerful and effective way to reduce the interest payable, saving you thousands over the long term.
Based on the example above, if you were to receive a refund of $1,000 and you put the refund straight into your home loan account, you could save approximately $3,600 in interest and reduce your home loan by up to two months off the lifespan of the loan.
Apply this strategy over the life of the loan and you are looking at a saving of tens of thousands of dollars, as well as wiping years off the life of the loan.
The best part of this mortgage reduction strategy is that you hardly notice the pinch.
So, at the start of the new financial year, dedicate all or a significant portion of your tax refund to your mortgage, make regular, extra repayments part of your loan management strategy and reap the rewards.
To find out about other simple mortgage reduction strategies, contact us!
