It’s true – there are several ways to pay off your home loan a bit faster than the average 30-year term, such as making extra payments or using an offset account. However there is another alternative that could help you pay it off in approximately 10 years with no extra payments at all, says Richard Sheppard.
Sound like a trick or scam? Not at all – it simply involves buying an investment property that grows at close to seven per cent per annum, switching your loan from principal and interest repayments to interest only repayments, then using the reduction in monthly repayments to cover the holding costs of the investment property. It may sound hard to believe but the difference between interest only, and principal and interest payments is actually very close to the holding cost of an investment property after receiving rent and associated tax deductions.
If you look back to our earlier article on negative gearing in a nutshell (available on the inSynergy website under ‘News’), it explains how a fairly average, but relatively new $500,000 investment property in a capital city can cost as little as $50 per week at a variable rate, or around $80 per week for a slightly higher fixed rate loan.
Take for example a $500,000 home loan on a 30-year term at seven per cent interest. The principal and interest repayment is $3,263 per month (or $753 per week). The interest only repayment is $2916 per month (or $673 per week). The difference is therefore $80 per week, which is the same as the weekly cost of the investment property at a fixed rate, or slightly higher than the weekly cost of the investment property at a variable rate.
So the question becomes, how do we then pay off the home loan if we switch to an interest only loan?
Simple – by holding the investment property until it increases in value to slightly more than double, then selling it and paying off the home loan with the proceeds. There is always the chance it could take a bit longer than 10 years but on the other hand, it could also take less. At 7.2 per cent growth, it takes 10 years to double, at six per cent growth it takes 12 years to double, and at five per cent growth it takes about 14 years – all of which are far quicker than the 30 year home loan, so well worth serious consideration.
This strategy of course requires more debt, which can carry more risk, so you need to be comfortable with the repayments and understand how to manage the risk – even more reason we strongly advise you to seek professional advice if considering this approach.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.