Tuesday, 11 December 2012

Post settlement - put your ongoing structures in place

Once your home loan is settled, you will find yourself in the dichotomous position of trying to pay down your mortgage as quickly as possible, while the bank is in parallel trying to get you to keep your loan balance as high as possible so that they can maximise their profits.  Generally any loan feature that they describe in glowing terms (e.g., offset accounts, line of credit loans) is a money winner for them, as it is likely to encourage you to spend any additional funds you’ve worked hard to save. 

So it’s really important that you structure your financial affairs in a way that discourages dipping into your additional loan repayments.  The best way I can think of to do this is to have four separate accounts:
  • Home loan account (this is where your regularly monthly loan payments go; you’ll have multiple loan accounts if you have split fixed/variable components to your loan)
  • Offset account for additional home loan repayments (this account you will never, ever withdraw from until you repay the loan)
  • Offset account for savings (this account you will withdraw funds from as you meet your savings goals – e.g., for renovations, cars, travel, etc.)
  • Transactional account