Better utilisation of surplus cash flow can help clients reduce the interest payable on their home loan. Interest on these loans is normally calculated on the daily loan balance and then added to the loan balance on a monthly basis. Clients can reduce their average daily loan balance (and consequently the interest charged) using one or a combination of the following options.
Increase the repayment frequency
A fortnightly repayment has the impact of reducing the loan balance every two weeks instead of monthly, so over the term of the loan, your client can incur less interest.
Increase the repayment amount
Clients can use their surplus cash flow, increasing their repayment levels to help pay off the loan amount sooner.
Pay salary into the loan
By having salary paid into the loan account with a redraw facility or a 100 per cent offset account, the client benefits from:
- effectively increasing the repayment frequency
- reducing the size of the loan on a more regular basis
- a higher after-tax return than what they would normally obtain from a savings account, and
- easy access to their funds when they need it.