The below case study is just how important it can be to be set up correctly with your home loan.
Case study
• Mr & Mrs Smith – married couple (no children)
• Purchased first home - $400,000
• Borrowed $380,000
• Mr Smith earns $130,000, Mrs Smith earns $20,000
• They are planning to have a family in 5 years and buy a bigger home
• They intend to pay $35,000 in additional payments per year (i.e. at the end of Year 5 – extra repayments in loan = $175,000 – can be used to purchase new residential home)
• They intend to keep this property as investment and rent it out after 5 years
| Scenario A | Scenario B | |
| Ownership | Mr AND Mrs Smith | Mr Smith |
| Type of Loan |
Standard Variable Rate. |
Standard Variable Rate. Interest Only - Offset A/C |
| Monthly Repayments | $2,611 | $2,318 |
| Extra Repayments | $35,000 p.a. Deposited directly into Home Loan Account |
$35,000 + $3,516 p.a. Deposited directly into Offset Account |
| Loan Balance at end of 5 years | $148,393 | $380,000 |
| Available funds at end of 5 years | $175,000 | $231,607 |
| Interest paid at end of 5 years | $99,973 | $99,973 |
5 years later …
Mr & Mrs Smith have a 6 month old son and have used their available funds to purchase a new, larger property for $720,000 (plus $40,000 costs)
Their first property, now worth $550,000, is leased out, and they receive $22,000 per annum – a 4% return – or is it???
5 Years Later
| Scenario A (Principal and Interest Loan) |
Scenario B (Interest Only Loan) |
|
- Rental Income $22,000
- Tax Deductible Interest $10,863 p.a. - PROFIT from Investment $11,137 - Tax Payable on Profit = $4,288 - Effective annual return = 3.22% - Net Loss |
- Rental Income $22,000
- Tax Deductible Interest $27,816 p.a. - LOSS from Investment $5,816 - Tax (negative gearing effect) = $2,734 - Effective annual return = 4.50% - Net Savings $7,022 |
Good Debt v Bad Debt
| Scenario A (Principal and Interest Loan) |
Scenario B (Interest Only Loan) |
|
Good Debt = $148,393 @ 7.32% = $10,863 per annum Bad Debt = $760,000 @ 7.32% = $55,632 per annum
|
Good Debt = $380,000 @ 7.32% = $27,816 per annum Bad Debt = $530,000 @ 7.32% = $38,796 per annum
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