Wanting to pay off the home loan sooner is one of the most common goals we hear from clients. And lenders are lining up to convince you that they can help – offering eye-catching interest rates, cash rebates to refinance, lower fees, and other ways to ‘help you save’. It is easy to get caught up in the noise, but it pays to read the fine print when it comes to your loans (and get advice).
One lender, ME Bank, made headlines this week for all the wrong reasons – for absorbing their client’s savings that were held in redraw – funds that may have been set aside for financial emergencies, which are critical at times like these. So, given your goal to pay off your home loan sooner (while still having reserves for emergencies), perhaps saving into your home loan account is not the best idea?
Putting your extra savings into your home loan relies on being able to access your redraw and trusts that your bank will let you take out the extra money sitting in your loan account, if and when you need it. However, most lenders have redraw clauses in their loan contracts (that you signed when you took out your loan), such as:
- We may cancel, suspend or change the redraw facility at any time without notice.
- We have full discretion over whether to approve or refuse any withdrawal from the redraw facility.
- We can apply any credit in a redraw facility in reduction of any money you owe us.
Beside the risk that you won’t be able to access your funds when needed, there’s also another reason that I’m not a big fan of using your home loan account, with a redraw facility, to store your savings.
Most clients have a goal to pay off their home loans, often within a certain timeframe, and certainly sooner than the 25 or 30-year term of the loan as specified by the bank.
However, if you start using your home loan like a “line of credit” whereby you make extra repayments, only to draw them out again to spend, then you are unlikely to pay down your home loan in your goal timeframe. Redrawing from your home loan can easily become a habit – which is why I always insist that ‘what’s paid into the loan, stays in the loan’. Psychologically, it’s much more motivating to see your home loan balance continue to reduce (and have your adviser monitor your progress), reaching milestone balances along the way. But you can still have your emergency cash buffers and be working towards your saving and spending goals.
We have always been big advocates of having the right structure when it comes to your home loan, one that facilitates our clients’ cashflow strategies and helps them to save for short term cash needs (including having emergency cash reserves), while paying off their non tax deductible home loan sooner. This includes the right mix of making extra repayments (always a set amount above the minimum as prescribed by your lender) and saving surplus funds into attached offset accounts or investments.
By having your cash in separate but attached offset accounts linked to your home loan, ideally an account for each of your goals, you are able to quarantine your extra payments for a given purpose, while still giving you full flexibility of access to your funds. Yet you are saving an identical amount of interest on your home loan than you would if the funds were all pooled in the loan account, while giving yourself permission to access designated funds for your lifestyle goals. Although hopefully you’ll think twice before you withdraw from your aptly named “emergency” offset account.
If you need any further advice or assistance, please contact your financial adviser, or if you wish to discuss your options please contact Kristi, our Lending Associate at email@example.com or give us a call on 02 9232 6800. We’re always here to help.