How to lower your home loan interest rate to as little as 2%
A perfect storm of financial circumstances means many Australian property owners will soon be under major stress. The good news is a clever new tax solution could serve as a lifeline, writes Dominique Grubisa, founder and CEO of the DG Institute.
We Australians have a love affair with debt.
The average Aussie household now owes about twice as much as its members bring in across an average year. Collectively, we owe something like $2.5 trillion in household debt. If borrowing money were an Olympic sport, Australians would be decent contenders for the gold!
There are plenty of advantages of making use of the credit offered to us. Borrowing money allows us to own things now rather than waiting for them. Used wisely, borrowed money can help us make even more money and build our wealth.
But there’s also plenty of pitfalls. People can overextend themselves and borrow more money than they can pay back. When financial conditions change, they can find themselves in extremely serious trouble. I believe we’re on the verge of just such a time now. With interest rates at record lows and housing prices booming in recent years, Australians have been borrowing like there’s no tomorrow.
We have been egged on by banks who, through the ‘liar loans’ now being exposed by the banking Royal Commission, turned a blind eye to people’s true financial position and ability to repay. Bountiful interest-only loans – where mortgagees were exempted from re-paying any of the principal on their loans for up to five years – have encouraged people to get deeper and deeper into debt. Sky-high loan-to-value ratios and seemingly endless capital gains in the major cities just added to the problem.
But now the party appears to be over. In response to pressure from financial regulator APRA and the Royal Commission, banks have slashed the number of interest-only loans they are providing. Over the next few years, some $60 billion in such loans will expire and loan holders will be unable to renegotiate similar terms, forcing many into mortgage stress and forced sales. With the housing market falling, it could be a bloodbath.
But if you face the prospect of tough times as your interest-only loan expires – or maybe just want to improve your financial position – take heart.
There are options, solutions and workarounds that can significantly improve your position, potentially getting you out of trouble.
One of these is Loan Controller, a tax-efficient solution offered by a limited number of authorised outlets. (You can’t get it at the bank.)
Essentially, Loan Controller lets people who own a home and one or more investment properties to restructure the interest rates in a more tax effective way. So, rather than paying 5.6 percent on your home mortgage, you might pay 2 percent. Your investment property payments would, in turn, go up.
The rationale behind Loan Controller is that investment properties represent good debt. They are an investment that will hopefully appreciate over time, and the interest payments you make on them are tax deductible. The more you pay, the more you can deduct from your tax bill.
Your home on the other hand represents so-called bad debt. It puts a roof over your head, but the interest payments are dead money. You can’t claim them back.
Loan controller recognises the key differences between the two types of loan and decreases the interest rate on your home loan while increasing that on your investment properties. This is tax efficient and allows you to pay off your house sooner. So, say, for ease of explanation, that you owed $500,000 on your home loan and $500,000 on an investment property. The interest rate on the home loan is 4 percent and on the investment property is 4.2 percent. Your monthly repayments are $1600 and $1750 respectively, with the home loan payments as dead money.
Loan controller could allow you to restructure so that you pay 2 percent interest on your home loan and 6.15 percent on your investment property. Your ‘dead money’ home loan payments drop to $830, while the tax deductible investment property payments rise to $2560. It’s important to stress that Loan Controller has been reviewed and approved by the Australian Taxation Office. And, because this is the case, PAYG salary earners can even ask the ATO for a tax variation. You can alter the amount of withholding tax you pay, meaning you get more money in your hand now, rather than at tax time.
Loan Controller’s effectiveness will vary depending upon the ratio of the values of your home and investment property or properties. The ideal structure is to have one third of your debt on your home and two thirds on your investment property, but this wasn’t the case for me when I used the product and other permutations can work as well.
So, good luck with the coming challenging times. With the right strategies and help, you can avoid the potential turmoil and remain on track to achieving your wealth goals.
For information on the Loan Controller product, visit DGI Finance.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practicing legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.