12th March 2009

Paying off the mortgage is attractive

For most people, having a mortgage will be the biggest financial commitment they will take out in their life. So, after another round of rate cuts by the RBA, not only is your mortgage costing you less, but this is a great opportunity to make a real dent in that loan.

In a recent Financial Review article, the many benefits were highlighted, and there is real reason for excitement about taking advantage of the lower rates. The article uses this example. If your tax rate is above 31.5 per cent, putting extra funds into a home loan is tax effective, too. For example, a couple who are both paying 31.5 per cent tax (with each earning more than $34,000.00 a year), the return they would need from another investment to better the after-tax saving from repaying their 5.5 per cent mortgage would be at least 8.02 per cent, risk free.

Yes this is over the life of the loan, but you have to ask yourself where else could you get a similar or better level of return risk free?

This would apply to investments made with after-tax money - the same as cash used to pay the mortgage. Salary sacrificing pretax money into super would obviously show a different result.

If there's a strong case for paying off the mortgage for those paying 31.5 per cent tax, it's compelling for those paying 41.5 per cent and more in tax.

Using the same 5.5 per cent home loan rate, the return someone on $80,000 paying 41.5 per cent tax would have to get from another investment to improve the after-tax savings of extra home loan repayments would be just above 9.4 per cent, again risk free.

Paying extra dollars off your home loan is like getting an extra tax-free return.

Redraw facilities - which let you withdraw any extra repayment you've made - can be used if the funds are needed at a later stage.

At La Trobe there are no fees or penalties for accessing your redraw and it is available on 24 hours notice.

For households that can afford it, it's really worth capitalising on the interest rate cut by taking it further - either continue making monthly repayments at the old rate or make even bigger repayments. When interest rates go down and you continue making higher repayments, a bigger chunk of your cash goes on the principal of the loan, which means you pay it off more quickly.

Take a $200,000 home loan, where the standard variable rate was 7.69 per cent and is now the full 1 percentage point lower at 6.69 per cent. The monthly repayment will now be $1374.25. You can choose to take the lower repayment and your loan will take 25 years to pay down. But if you continue paying at your old rate ($128.54 more a month), you will pay off your loan four years and eight months more quickly and save $45,964.83 in interest costs over the life of the loan.

Now that is an attractive proposition!

Best regards
Iain Pepper


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Iain Pepper
Head of Lending

Iain Pepper is a Vice-President and the Head of Lending for the La Trobe Group.Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website. La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you. (1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Investors risk losing some or all of their principal investment. (2) The rating report is available on the La Trobe website or upon request. The rating is only one factor to be taken into account in deciding to invest. (3) Withdrawal rights are subject to liquidity and may be delayed or suspended. (4) Rates (where shown) are indicative and for information purposes only and must be confirmed by your La Trobe loan manager upon formal application. Rates are subject to change. Please refer to http://www.latrobefinancial.com.au for full comparison rate schedule