Tax time can be both exhausting and rewarding. On one hand you’ve got to sift through hundreds of receipts and bills, working out what you can and can’t claim. On the other hand, many Australians receive a rebate – so there is a reward to all the hard work.
Having a little windfall of cash every July can really help get on top of credit debt, pay off bills, fund shopping outings, or give us a nice little holiday. Unfortunately many Australians overlook the opportunity to contribute their tax refund towards reducing their mortgage.
Recent data from ASIC shows us that, on average, each Australian will receive a tax refund of $2,112. When it comes to what we spend it on, 29 per cent will use it to cover unpaid bills, 21 per cent will save it and 13 per cent will put it towards their credit card. However, just 9 per cent will use it to make an extra payment on their home loan – which is an incredibly low number. Despite interest rates being at record lows, high house prices mean many Australians still have hefty mortgages – so the time to make inroads is now.
So how much could you save if you put your tax refund on your home loan each year?
Well, if you took an average Australian home loan of $450,000 with an interest rate of 4.04 per cent and assumed you were right at the start of a 30 year loan term, then making an extra $2,000 payment every year, (the equivalent of an average tax return), you would save $47,000 in interest and knock more than three years off the loan.
However, we’ve got to remember that some families have two income earners, so tax time can often mean receiving two rebates. Putting $4,000 a year of extra payments on the mortgage saves a staggering $82,000 in interest and will wipe nearly seven years off the mortgage. All other things being equal, this approach would see you debt free in just 23 years and three months.
Obviously not everyone is a new home owner, and you might be five, ten or even fifteen years into your loan term. While the savings won’t be as high, it’s easy to see how making extra contributions each year could save thousands of dollars in the long run.
So how much could you save?
On a 30 year, $450,000 mortgage with an interest rate of 4.04%:
- Making a $1,000 extra repayment each year you could save $25,000 in interest and wipe two years off your mortgage
- Making a $2,000 extra repayment each year you could save $47,000 in interest and wipe three years and nine months off your mortgage
- Making a $3,000 extra repayment each year you could save $66,000 in interest and wipe five years and five months off your mortgage
- Making a $4,000 extra repayment each year you could save $82,000 in interest and wipe six years and nine months off your mortgage
- Making a $5,000 extra repayment each year you could save $97,000 in interest and wipe seven years and eleven months off your mortgage
If you want to learn about more ways to save years off your mortgage, give your local Liberty Adviser a call today.