Use Your Home Loan to Save Money

You probably look at your mortgage like a great big blackhole that your money disappears into. So when I say you might be able to save money with your home loan you might not believe me.

When you take out a variable rate home loan most lenders will offer you both a 100% Transactional Offset Account as well as a Redraw Facility. 

Whether you're a home owner with a mortgage or a property investor with an investment loan, you might be able to use these loan facilities to make genuine savings on your interest and your tax.

Here are some tips on how!

100% Transactional Offset Accounts

These are fundamentally the same as your average transaction account. Your lender will give you a debit card and you will be able to use this account for your everyday spending.

The only difference between this facility and your regular transaction account is that this account will be linked to your home loan. This means the money you park in your offset facility won't accrue any interest. Instead the balance of your offset account is subtracted from your loan total, meaning that you pay less interest on your debt. 

You will be saving money on your home loan interest rather than earning interest on your savings. Because home loan interest rates are generally higher than those of savings and transactions accounts this strategy will provide you with greater financial benefit.

Eliminating the interest you would otherwise earn on your savings may also save you money on your tax.

Tips for Home Owners

As a home owner I would suggest using your 100% Transactional Offset Account as your spending account, while using your Redraw Facility as your savings account.

Tips for Investors

As an investor I would suggest using your 100% Transactional Offset Account as both a transaction account and a savings account. I recommend investors avoid Redraw Facilities, and I will explain why below.

Redraw Facility

If you are paying off your home loan for your principal place of residence and you are looking to save at the same time a Redraw Facility can be a great savings tool.

This facility allows you to use your surplus funds to make extra payments on your mortgage. You'll be able to store your money within your loan account as if it were a savings account and then withdraw these funds at a time of your choosing. Like the offset account, using your Redraw Facility will mean that you won't accrue interest, and instead you will reduce your loan interest. 

Tips for Home Owners

Redraw Facilities are usually less accessible than your offset account so this makes them more suitable to use as a savings account. I recommend storing both your savings and your billing expenses in your Redraw Facility.

Tips for Investors

As an investor it is best to avoid Redraw Facilities. The reason being is that withdrawing money from a Redraw Facility on an investment loan can complicate the tax-deductibility of your loan.

If you withdraw money from an investment Redraw Facility for a non-tax-effective purpose then the money added back onto your loan may not be tax-deductible and this means you may not be able to subtract all of your loan interest from your taxable income**. 

The majority of lenders will offer these facilities as a part of your loan package. If you have an existing loan you may be eligible to open one or both of these facilities, so speak to your lender and find out about what loan facilities are available to you!

** For your particular tax position it is always best to consult your accountant or registered tax advisor.

Don Farquharson,

Loan Solution Expert

Owner & Principal Lender of All About Loans

Photo Credit: https://www.flickr.com/photos/pictures-of-money/

Budgeting for Your Home Loan Deposit

Saving for a home loan deposit can seem like a mammoth task, particularly when you don’t have a saving strategy in place.

With this in mind I’d like to put forward a few budgeting suggestions to make the process a bit easier.

I will lay out a very basic four step process which will give you a fundamental budgeting strategy.

These steps may seem simple but they are important to follow as they can remove a lot of stress and margin for error from the process.

1. Understand your money.
2. Set your savings target.
3. Draw up your savings plan.
4. Start saving!

Step One

The first step is the most important of the process. The key to any budget is understanding and monitoring the movements of your money. If you don’t know exactly how much you can save then you could set yourself up for failure.

To find out your saving capabilities you need to study your transaction statements.

I recommend printing out at least an entire month’s worth of statements. Or if you predominately use cash keep a notebook of your spending.

As you look over these you need to focus on your expenditures.

Look at every single expense and try to label it as either a ‘mandatory expense’ or an ‘optional expense’.

Your mandatory expenses will include rent, bills, groceries, petrol etc.

Your optional expenses will include things like movie tickets, restaurant dinners, and other leisure activities.

Calculate how much of your money is going towards mandatory expenses and how much is going towards optional expenses. As a couple you need to add your income and expenses together to make these calculations.

This will give you a good idea of how you are spending your money.

In some cases you might be able to find ways to lower your mandatory expenses, but generally the majority of your savings will come from setting limits to your optional expenses.

This might mean going out for dinner once a week instead of twice a week, or deciding to make your own lunch rather than buying lunch each day. 

Look at what limits you can put in place and come up with a dollar figure that you can put aside each week or each payment period, but make sure your figure is realistic and achievable.

Step Two

Next set your savings target. To do this you need to decide how long you are willing to save for and what sort of home you would like to buy. In most cases your first home won’t be your dream home. Buying an affordable home can be a stepping stone to your ideal property however, so set a realistic goal.

Step Three

Now move on to step three and write up your savings plan.

This should include:

• Your weekly allowance for each expense (e.g. Groceries: $100, Entertainment: $50, Bills: $150)
• Your weekly or regular savings deposit
• Your savings period (include here the number of savings deposits)
• Your savings target

While this savings plan sounds very simple you also need to consider your savings method.

Separating your savings from your spendings is the best approach, so if you don’t already have a separate savings account you need to establish one.

Once this is in place set up an automatic transfer to savings as your pay arrives in your account, or speak to your employer and organise for part of your wage to be delivered directly into your savings account.

You can detach most savings accounts from internet banking as well, meaning you can only withdraw money from them by visiting a branch.

Step Four

Once your plan is drawn up it is time to start implementing it. Remember, your budget is only as good as your last review.

Make sure you monitor how well you are sticking to your plan and what areas need to be improved or adjusted. This is where laying out an allowance for each expense is extremely important.

You won’t get it right the first time. It is something that you need to refine over time.

I recommend reviewing your budget at least once a month.

This process may seem like a hassle and you may think that you are capable of saving without a plan, but there is great benefit in understanding your money and creating a savings plan pays great dividends.

If you follow this basic budgeting strategy you will see improvements in your savings, and hopefully this will mean you will be able to put that deposit down on your home sooner.

Don Farquharson,

Loan Solution Expert

Owner & Principal Lender of All About Loans

What are ‘Genuine Savings’?

When you apply to the bank for your home loan you will need some savings to put towards your deposit, however it's not just about the amount of savings you have.

The lender you apply for your loan to will also care about your savings processes.

They will ask you for a deposit of ‘genuine savings’, and you may be wondering what exactly this means.

For savings to be classified as genuine, most banks will look at three months of your bank statements to see that regular deposits are being made towards your savings. While it’s expected that your bank balances will fluctuate during each payment period as you put money towards your regular expenses, lenders generally like to see an upward trend.

The reason lenders examine your savings history is because it gives them an indication of your financial discipline, and how well you will be able to commit to your loan repayments.

In some cases however, you won’t accumulate the savings for your deposit through a regular savings pattern. You may acquire a lump sum of money, which could be a gift from your parents, an inheritance or possibly the sale of an asset like a car.

Whether or not you can use this as a deposit depends on the size of the lump sum.

Depending on the lender, if your lump sum is less than 10% to 15% of the price of your property, you will need to hold the funds in a savings account for three months before they will be considered genuine.

However, sometimes when you are buying your home you have your time-frames dictated to you by real estate agents and other property market factors.

If you are on a tight time-frame there are some ways around genuine savings policies.

For example some lenders will accept a letter from your rental agent giving 12 months of rental history as evidence of your financial responsibility.  

While it’s always best to have savings behind you, don’t be daunted by bank policy. If you have your eyes on a home, but are unsure of whether your financial position is strong enough to apply for a loan, then a finance broker is your best friend.

We will often be able to find a solution that meets your loan needs as well as the bank's policies. While genuine savings are important, we focus on the full picture and displaying your financial position to the bank in the best possible light.

Call 0732525208 to receive free advice today!

Don Farquharson,

Loan Solution Expert

Owner & Principal Lender of All About Loans

Photo Credit: https://www.flickr.com/photos/pictures-of-money/