I am looking for some advice, or at least thought starters, based on my current situation.
Currently I am paying off the mortgage on my own home, I have been living here for about a year and owe 235K on a house I paid 270K for. I am currenly meeting the loan repayments and have a little to spare. I also have a 30K HECS debt, that is all the debt I have.
The question I have is what should I do with this bit extra money.
As I see it there are 3 options.
1. Put it into homeloan, leave it there in an attempt to reduce the value owing on the loan. This is currently what I am doing.
2. Pay it off my HECS debt in an attempt to free up some more cash flow (I am currently paying about $300 a month into HECS) to allow for future investing.
3. Save a bit in the homeloan then use th redraw to invest either into shares or property, ideally property.
I initially thought paying the HECS off was a silly idea as it is indexed at about 2.5% which is much lower than any other form of finance, but if you pay extra the government adds 10% to what you pay and the idea of freeing up cashflow appealled to me. So, is the idea of trying to clear my HECS debt before investing a silly one?
Any advice would be greatly apprectiated!
Freeing up cashflow by paying HECS isn't as easyas it seems eg if you paid $3000 off the HECs debt, you would not reduce your HECs payments by 10% as your annula hECS paymnets are determined by your income. Are you looking at converting your hiome into an investment property at some time. If you are then you should set up an offest account rather than a redraw
I understand that to free up cash flow I have to pay complete HECS debt, but thanks for bringing it up as it is an important point. It seems that unless I can clear the debt there is no point paying some of it off.
So, for the moment I am going to keep the money flowing into the homeloan, but at the time when I have enough redraw to clear my HECS debt, should I look at paying it then or am I better off leaving the compulsory repayments to cover HECS over the long haul?
I am not looking to convert my home into an investment property, but I am interested as to why an offset loan would be a better option if that was what I was looking to do.
Interesting to read about your HECS issue. A new no deposit loan product that also pays off all your HECS is now available. Details are on http://www.hecs.com.au The company that developed the loan is First Permanent (a subsidiary of Merrill Lynch).
The loan benefits are explained on the web page by use of an example (as follows)
Rebecca is a lawyer with 5 years post-graduate experience.
She currently earns $85,000 per year gross. She wanted to stop renting and buy her first home.Although the banks were more than willing to lend her money, the amount they were prepared to lend her was not enough – all because of her high level of HECS repayments. Like you, Rebecca had an outstanding HECS debt. Hers was $17,000.Rebecca was therefore paying annual income tax of $23,150 (at 2006/07 tax rates plus 1.5% Medicare Levy) PLUS she was paying compulsory HECS repayments of $6,800 per year. Rebecca was paying a total of $29,925 in income tax and HECS payments to the government each year – and that was before she paid her rent. Graduate Home Loan was the answerRebecca took out the Graduate Home Loan. She now has a no-deposit home loan AND her HECS Debt has been repaid in full.The Key Benefits to Rebecca were- She now has an extra $6,800 per year in after tax income that she is using to help pay off her no-deposit Graduate Home Loan. This extra $6,800 allowed Rebecca to borrow around 20% more than she could with the HECS debt still owing
- She got to keep all of the $7,000 First Home Owner's Grant
- She received a 10% discount on her HECS debt worth $1,700
- She got into the property market years sooner
- She is no longer paying 'dead' rent money.
- She did not have to save for any deposit.
Very inovative.
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