Why conventional wisdom will cost you!

Ben Nash

How you can make smart decisions with your mortgage to give you better cashflow, more flexibility, and cut your tax bill.

I read an interesting article the other day that talked about mortgages and some really common problems people face when deciding on their financial strategy. Reading the article I saw how easy it is for people to get confused and make the wrong decisions, which can cost them heaps long term and hold them back financially. I wanted to write this to help you avoid making the same mistakes.

When it comes to your mortgage, there are loads of options; interest only, principle and interest, fixed rate, variable rate, and the list goes on… It’s not surprising so many people struggle to get this right! For most people, your mortgage is your biggest liability/debt and often biggest regular expense. So it’s not hard to see that if you don’t make the right decisions you can end up costing yourself a packet, and even holding yourself back from making progress and getting the results you should with your money.

As a Financial Adviser that specialises working with young professionals, executives, and business owners, I can tell you this is a really common issue that causes a lot of confusion. It’s also a decision that will have a really big impact on your overall financial situation (cashflow, tax, interest costs, etc.) When I go through this with my clients, and when you’re making these decisions, you should talk through each of the options to make sure you understand their impact before you choose your final set-up. Please don’t jump into any decisions just based on the ‘conventional wisdom’ and what you’re told by their parents/mates/colleagues/neighbours etc. I promise you’ll often be surprised at the results!

Once you understand this, you’ll also be surprised and how easy it can be when you make some simple decisions, and how much more you can get out of your money if you get this right.

The article was talking about the difference between interest only mortgages and those with principal and interest repayments. Original article can be accessed here.

When I was reading the article it got me thinking about the benefit a good adviser provides by helping their clients cut through this sort of ‘noise’. Basically, the article was talking about how ASIC (industry regulator) wasn’t happy about people buying property with interest only loans. It’s suggested in the article that setting up your loan under an interest only structure may be detrimental to the consumer. On the face of it, this would suggest you should rush out and change your loan to principle and interest immediately.

But, in my opinion, this is posturing by the regulator. Smart posturing in that if Australians as a whole follow their suggestions, the overall risk of the property investment market in Australia is reduced, but, on an individual level (i.e. for you), following their guidance is something that will cost you serious money!

What was not mentioned in the article, and that shouldn’t be ignored by property investors, is that if you’re disciplined, setting up your mortgage with interest only payments and being committed to making extra payments into your mortgage offset account is a strategy that will provide significant flexibility, and some massive future tax savings. Discipline is the key word here!

It’s important to note that when you pay $1,000 into your mortgage, from an interest cost perspective the outcome is the same whether you pay $750 in interest costs and a $250 principle payment vs. $750 interest and $250 to your mortgage offset account. The difference is that in the latter scenario, you will have access to the funds should they be required, and in the future if you move out of the property, you can remove the funds from your offset account and the debt on the property will increase to the original level. Why would you want your debt to increase you may ask? Read on…

For people that have purchased a property with the idea of someday moving out and using the property as an investment, repaying debt will mean that when you move out of the property, your tax deductions are lower (because the debt and therefore tax deductible interest costs are lower). This often means the property owner will give up some lucrative tax benefits in the future, which is clearly an outcome most would want to avoid!

Secondly, paying money into a loan instead of an offset account effectively means your funds are trapped. This gives up significant flexibility in that your funds aren’t available if needed for some unexpected emergency, which when putting together a good risk management strategy is important!

For these reasons, you can be way better off by NOT following the advice of ASIC! Of course you need to consider your situation, and should probably talk to a professional adviser before rushing out and making any big changes to your strategy. But don’t always believe what you read in the news!

Five First Home Buying Mistakes to Avoid

Do you want to buy your first home, but looking at rising prices and feel it’s getting more and more unattainable? Are you confused by all the options for how and where to buy and not sure about what’s the best strategy for you? Are you worried about making a mistake that will force you to make drastic lifestyle sacrifices?

In this guide we cover the five most common (and painful) property buying mistakes so you can avoid them and buy property the smart way. Enter your details below and get it straight to your inbox. No spam, I promise.

Boom! Your free guide is on its way to your inbox!
Please fill in the required fields.