Your home is a great investment, right? But did you know your home loan can be a better place to park spare cash than a savings account?
So you’ve got some spare cash. Fantastic! Now take a moment to think about what you’ll do with the money.
Prevailing wisdom says the cash should be deposited in a savings account. But in today’s environment of ultra-low interest rates, that may not be such a money-spinning strategy.
Low returns, fully taxed
Interest rates on savings accounts are exceptionally low at present. You may be able to earn 3% on savings but even that’s likely to be a short term offer.
Worse still, interest income is fully taxable. A high income earner could lose almost half any interest earned to the tax man.
Let’s crunch some numbers to see just how little you could really earn with a savings account.
We’ll say Sue deposits $5,000 into an account paying 3% interest. Over the course of a year, her money will earn approximately $150. However, if Sue is a middle income earner (earning between $37,000 and $80,000 annually), she will pay tax of 32.5% on the interest leaving her with an after-tax return of approximately $101 It’s hardly something to get excited about.
Home loans – a money-wise alternative
Happily, there is a more rewarding alternative. Our hypothetical investor Sue could deposit the $5,000 cash into her home loan. Why? Because it’s a chance to save more in loan interest than she’ll earn with a savings account. And that provides a big opportunity for Sue to forge ahead with her loan.
Let’s say Sue’s home loan is worth $300,000 with a rate of 3.95%. By depositing $5,000 into the loan, Sue instantly slashes the balance down to $295,000. In the first year alone this can see Sue save around $198 in loan interest – money that goes straight into Sue’s pocket, and not the tax man’s.
But here’s the thing. The savings continue year after year. In fact, if we assume Sue makes that $5,000 lump sum payment in the fifth year of her loan term, she could wipe as much as $8, 219 off
the total loan cost especially if she resists the urge to draw the money back out. That’s over $8,000 in money saved, a potentially far better return than Sue could make with many other investments.
What if I need the cash?
Virtually all variable rate home loans come with redraw. So any extra money paid into your loan is always available if it’s needed.
The best part is that you don’t need a big lump sum of cash to make a decent dent in loan interest charges.
Drip-feeding even small sums into your loan can lead to supersized savings over time.
To understand how your home loan could be a smart place to store savings, check out Aussie’s lump sum repayment calculator or speak with your local Aussie broker.