Ask Paul: How can we pay less interest on our mortgage?


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Q. My partner and I are lucky enough to have had an offer on a house accepted.

While this is a very exciting time for us, it also poses many questions about paying off our mortgage as soon as possible.

As the settlement isn't until December, this provides us with time to explore our options in regards to mortgage minimisation strategies.

Angus is keen to reduce the interest payable on his new home loan, but paying down a mortgage early is a trap for many property owners says Paul Clitheroe.

At present, neither my partner or I are utilising the first home super saver scheme (FHSSS).

Is it possible to still access the advantages of the FHSSS with post-tax contributions for this financial year [2018-19], then utilise $15,000 worth of salary sacrifices next financial year?

If so, what impact will that have on our HECS repayments this and next financial year as we both have HECS debt and I already salary sacrifice due to my profession (non-profit health care).

As our mortgage will be roughly $420,000 (about $900 a fortnight) to begin with, what is the most beneficial way to recycle this loan into tax-deductible debt while minimising the duration of, and interest payable on, our mortgage? - Angus

A. Great news, Angus! The major problem I have is that we are past the June 30 end of the financial year. So let's focus on what might lie ahead.

A real trap for many home buyers is paying down their mortgage. It sounds like a great idea.

You cannot claim tax deductions on your home loan, so just try to get rid of it.

The problem here is that many people try to keep their family home as an investment property when they buy another place to live in.

But if you pay off the mortgage in part or in full, the level it is at when you start to rent it out is the maximum amount on which you can claim interest as a tax deduction.

As a result many people end up with a large, non-deductible debt on their new home and a small, deductible mortgage on their old home, which is now an investment property.

For you it is about the future.

So only add to your mortgage via an offset account, which does not change the size of your mortgage.

You could use that money in time to come to help buy your next home, but have your mortgage at its maximum size if you keep it as an investment property.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.

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