What would you do with a refund from your tax return? Putting it towards your mortgage could save you more than you think.
How we spend our tax return
According to the MoneySmart website, 82 per cent of Australians expect to receive a payout from the ATO. And a 2015 survey of MoneySmart users found that 29 per cent of Aussies use it to pay bills. Only five per cent splurged on a holiday, with another five per cent spending big on things like cars, jewellery or education.
Shedding debt to save more
Having extra money put away can be reassuring, so it’s not surprising that 21 per cent of people surveyed chose to save their tax refund. But when you consider the amount of interest you’re paying on outstanding debts it could make more sense to join the 13 per cent who paid off loans or credit cards or nine per cent making extra home loan payments.
Lose the high interest first
The interest rates on personal loans and credit cards is generally higher than you’ll be paying for your home loan. So it could be wiser to use the extra cash for these debts first. And if you’ve still got a way to go before clearing the balance, refinancing your home loan to include other debts – known as debt consolidation – won’t get rid of them, but it may save you money and simplify your household finances.
Putting it all on the house
So just how much could you save by putting your whole tax refund towards your home loan? First of all, it depends what type of loan you have. Not all loans allow you to make lump sum payments or may limit how much extra you can pay. So you need to check the terms and conditions of your mortgage first.
Let’s say you’ve received the average tax refund from the ATO – that’s $2112. It’s a long way off a lotto win, but if we look at what happens when you take it off your home loan balance, you might be feeling a lot better off.
Assume you have a $350,000 mortgage over a 30-year term at 3.99 per cent interest. If you make a lump sum repayment of $2112 after 5 years, you’ll save $3582.34 in interest payments and have your loan paid off 3 months earlier.
The earlier you make a lump sum payment, the greater the savings. If we do the same calculation, making the lump sum payment after just 2 years, the interest savings rise to $4,300.56 and you’ll be ahead on your loan by 4 months.
Keeping your options open
If your mortgage includes a redraw facility or offset account, you can use extra cash to save on interest and still have access to it when you need it. Just remember that you’ll only be saving interest for the time that the money is available in your offset account or on your mortgage account balance.
Are you looking for ways to save on your mortgage? Share your thoughts in the comments below.