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Looking for a way to pay off your home loan quicker? Check out our “Debt Chunking Strategy”

You may have read the general strategies banks provide about how to pay down your home loan quicker. For example, setting up a budget so you can work out how to make extra repayments off your loan. Or making repayments fortnightly instead of monthly. These are all good and will work if you do them consistently (and don’t redraw all those extra payments when you need a holiday or new car!).

However, let’s look at the psychology of money and how reaching small goals can improve our behaviour and keep us motivated over time.

Debt chunking involves taking off a portion of debt which we can make accelerated repayments to and pay off in a short space of time – celebrate it, and then carve off another chunk. It creates the mindset that you can pay off your home loan and accomplish this goal, which means you’ll generally stick with it.

 

Couple A

Have a home worth $600,000 and total home loan of $430,000 at 4% interest.

Currently paying $2,100 off per month, Couple A will have their home paid off in 28 years and 9 months.

 

Couple B

Have a home worth $600,000 and total home loan of $430,000 at 4% interest.

Split their loan into two:

1) $350,000 which they set up as interest only (let’s call this ‘tomorrow’s debt)

2) $80,000 which is what they will work on paying off as quickly as possible (‘today’s debt)

They create a budget and can afford to put $600 per week towards this goal.

They also set up two offset accounts. One for their savings attached to the smaller loan and one for their spending attached to their bigger loan.

The repayments for ‘tomorrows’ interest only loan is $1,166 per month.

The repayments for ‘todays’ loan is $1,434.

Couple B can pay off ‘todays’ debt in 5 years (and have a few drinks to celebrate!).

They then carve off another chunk and re-start the process. Then they keep repeating the process as their incomes increase over time and also use their tax return money to add to the goal…

 

Result

Couple B have their home paid off in 16 short years, while Couple A still have another 12 to go.

 

If you would like some help creating similar goals, we can help with this. Alternatively, you might want to look at a debt recycling strategy to invest some money. As an example in an investment property or a share portfolio. Either way, the key with debt management is to always spend within your means, to plan for the unexpected and never borrow for depreciating assets (e.g. cars/holidays).

 

We love seeing our financial planning clients pay off their home loans quicker than expected. If you would like to have a chat with us at either our Adelaide or Broken Hill offices click here.

If you feel you would like some help in this area please don’t hesitate to contact us on (08) 7160 1191, email [email protected] or visit www.chandlerprivatewealth.com.au