systematically accelerated debt reduction

Systematically Accelerated Debt Reduction

Techniques to reduce your loan term by years, possibly decades, by reducing total interest paid to the lender.Mark Greggs is a credit representative (Credit Representative Number 479393) of BLSSA Pty Ltd (Australian Credit Licence No. 391237)

Pay off your home loan in 10 years!

• It’s not just hype, it’s mathematically entirely possible, and it isn’t difficult to understand.

• It takes the right loan product structure, discipline and also a key assumption that people borrow within their means and don’t over extend themselves.

Please note all calculations in this presentation are examples only and each loan will be subject to specific circumstances

How it works:• Let’s take a hypothetical example, and make it a newly

married couple buying their first home. • He’s a mechanic, on $50,000 PA, she is a school teacher

earning the same, so combined household gross income of $100,000, net $84,406 after tax.

• So monthly disposable income = $84,406 / 12 = $7,033• They have saved $20,000 together over the last 3 years to

put towards a house deposit. • They buy a new unit for $350,000.• Total borrowings ($350k-$20k) = $330,000, add lenders

mortgage insurance and state charges of $11,469, so total borrowings of $341,469.

Efficient Loan StructureAll

Income$7,033

Loan$341,469

Monthly

Expenses

LoanInterest

They take out a loan product whereby they directly credit their salary straight into the loan of $341,469.

Remember, interest is calculated on the daily balance, so the sooner money goes into the account, the better.

The loan amount is immediately reduced by $7,033, so now interest is calculated on $334,436.

Using Credit To Your Advantage• They live on a budget within their means, and use their credit card

for all their expenses. Simple reason for this – they have up to 55 days interest free on their credit card.

• They pay it out in full each month from their loan account to avoid extra fees – this is important. The loan account should include such functionality as bpay, salary crediting, free ATM access for cash etc – use it like a normal savings account.

• Instead of building a savings balance which earns interest income, which is taxable, instead save interest payments by keeping money in the loan account for as long as possible to reduce interest payments.

• This has a long term ‘snowball’ effect. But we’re going to look at this even more simply.

ABC: Always Budget Carefully• Their monthly expense budget:

• Food - $800• Petrol - $300• Telephone - $200• Internet - $50• Insurance - $150• Entertainment - $400• Utilities - $150• Rates - $250• Misc - $300

• Total - $2600

• All these expenses are paid via credit card, which is then swept out to zero balance via the loan account at the end of the month.

• So the $2,600 stays in their account for the whole month, until it is paid out at the last possible instant.

Credit Card- Used To Pay All Expenses- Swept Out In Full Every

Month

Month 1

• Opening balance $341,469• Less Income - $7,033

= $334,436• Add Expenses + $2,600

= $337,036• Add Interest + $1,389 (Interest calculated on 341,469 @ 4.88%)

• Closing Balance = $338,425

• So in the first month they have paid ($341,469 - $338,425) = $3,044 off their loan.

Month 2• Opening balance $338,425• Less Income - $7,033

= $331,392• Add Expenses + $2,600



Note how the interest has already reduced from $1,389 to $1,376 in just one month

Month 3• Opening balance $335,368• Less Income - $7,033

= $328,335• Add Expenses + $2,600



In 3 months they have reduced the loan by ($341,469 - $332,299) = $9,170

Paid In 10 Years• Note for this example I’m calculating interest from the opening

balance each month – their salary would reduce the balance and therefore actual interest calculation as soon as it is received, but for ease of illustration I have erred on the high side.

• In 3 months they have reduced the loan by ($341,469 - $332,299) = $9,170

• Also note that interest has already reduced by ($1389 - $1364) = $25 per month, in just 3 months.

• If everything remained the same, assuming same rate of loan reduction ($9,170 / 3 = $3,056 per month), it would take them $341,469 / $3,056 = 112 months, or just under 10 years to totally pay out the loan.

• Of course, with reducing interest calculated on the reducing balance, this would further reduce the term (but let’s not overcomplicate this example here and now, and err on the high side).

In Closing• Don’t confuse the difference that people will say they are paying

extra into the loan, which is why this works.

• The reality is they aren’t just paying extra, they are in fact paying everything they can onto the loan and maximizing their situation to be able to pay it out as quickly as they possibly can

• This can be setup as a single loan as shown or an offset account dependent on the clients needs analysis and circumstances

• Saving two decades of interest payments. Imagine what a great start this would be for a couple – to have their mortgage fully paid out by the age of say 35 (assume they married at 25)

QUESTIONS?

www.redlandsmortgages.com.au

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