For property investors, the loan on your Principal Place of Residence (PPOR) will likely be the priority for repayment, as it confers no tax benefits. The best way to reduce your mortgage, of course, is to pay it down as quickly as possibly – but this isn’t a lot of help if you don’t have the spare income to achieve it. There are, however, strategies which can help you use your existing cashflow from your income and investment properties to reduce the term of your mortgage quite substantially. When used together, they can save decades off your mortgage:
Get depreciation schedules for each investment property, regardless of age. Depreciation schedules are more than worth getting on 99% of occasions, yet it is amazing how many investors don't get one. They maximize the return you can claim, which is important for the next step.
- Submit a tax variation at the start of each financial year. Most properties will be negatively geared to start with, particularly once you factor in depreciation. You can work out in advance what your likely losses will be from property investments, and submit a variation to the ATO, who will alter the amount of tax withheld accordingly, meaning more money in your pocket throughout the year. Depending on what the sizes of the losses are (remember this includes depreciation, a non-cash loss), this can be thousands of dollars back in the hand throughout the year, all of which can be put against your mortgage, saving you interest. If you haven’t submitted a variation before, I’d highly recommend talking to your accountant before doing so.
- Consider a Revolving Line of Credit (RLOC). This is not for everyone, and you need to be able to strictly control your finances, but when used properly this can make dramatic inroads into your PPOR debt. A revolving line of credit can replace a normal mortgage, where the bank will provide you with a credit limit up to certain percentage of the value of the property. You don’t make traditional repayments, however, instead all money coming into the account reduces the amount borrowed, while all money coming out of the account is effectively borrowed again.
The revolving line of credit account becomes the main account for all incoming and outgoing transactions. Your incoming and outgoing payments will look as follows:
- Work income (with variation submitted to reduce tax)
- Investment Property Income (ideally paid weekly)
- Any other sources of income
- Mortgage Repayments (interest-only, monthly)
- Investment Property Repayments (interest-only, monthly)
- Personal Bills & Spending (paid by credit card, balance paid monthly to avoid paying interest)
This structure means that your money is working for as long as possible each month to reduce the interest on mortgage. Tied to a low credit limit and sound budgeting, this is a great tool for limiting your spending and paying debt down rapidly.
But you absolutely need to be sure this is the right product for you, and you need the discipline to use it effectively. So speak to your mortgage broker and your independent financial planner to get the right advice. If you’re not comfortable with a RLOC, use an offset account.
Depending on how many incomes and investment properties are in play, these three strategies together can put tens of thousands of dollars per month, that otherwise wouldn't be in play, working towards reducing your interest and paying your mortgage down sooner. Allied with careful budgeting, this can lead to mortgages paid off in less than a third of the time of a traditional mortgage.