THE PAY DOWN CYCLE METHOD: A Mortgage Structure Hack to Help Pay Your Mortgage Off Faster!

When you take out a home loan for the first time you are most likely going to sign up for a 30 year mortgage term.

This is mainly because you are pumping all of your available funds into the deposit, so you take out the maximum term available on a mortgage which minimises your loan repayments.

But do you really want to be paying off that mortgage for the next 30 years?

If the answer is no, then there is something you can do about it - and it all comes down to how you structure your mortgage.

So in this week’s update, we will explore one of the ways you can nail that mortgage in no time using the Pay Down Cycle Method.

How Does The Pay Down Cycle Method Work?

The Pay Down Cycle Method is an effective way to accelerate the repayment of your mortgage.

It involves strategically structuring your mortgage to reduce interest costs and pay it off in double time.

Here's a breakdown of how it works:

Let’s say your home loan is $530,000.

We split the loan and take $500,000 and fix it for 12 months, then set up the remaining $30,000 as a Flexi Home Loan (otherwise known as a Revolving Credit).

The goal is to “pay down” the $30,000 within 12 months before the fixed rate portion comes up for renewal.

Sounds simple right.

So how do you do it?

The focus is on the $30,000 Flexi Home Loan.

With a Flexi Home Loan you might be paying the floating rate which is a bit higher than a fixed rate, but you have the flexibility to pay lump sums at anytime.

It's also important to note that you only pay interest on the balance that is owing.

So if you have a lump sum - like your income - credited directly into the Flexi Home Loan account, this will reduce the balance of the loan quite considerably which will minimise your interest costs.

For example, if the Flexi Home Loan is $30,000 and you get a combined monthly income of $10,000 credited directly to your Flexi Home Loan account, you will only pay interest on $20,000 until you draw the money out again.

You leave this $10,000 sitting in your Flexi Home Loan account keeping the balance down, while you use your credit card to pay your outgoings (such as utility bills, insurance etc.) and your everyday purchases.

Now, most credit cards come with a number of interest-free days on purchases. These are usually about 30 days (the statement cycle period), plus a number of days until the payment due date. Many credit cards have up to 44 or 55 interest-free days, (although some credit cards have no interest free days so you need to make sure you choose the right one).

If you pay the full balance owing on the credit card, by the due date, you won’t be charged any interest on your purchases. So you need to make sure you never miss out on paying the balance by setting up a direct debit from your Flexi Home Loan to pay the credit card off in full each month.

This way you have been able to take advantage of the free credit for the month while your income has been sitting in your Flexi Home Loan account keeping the balance down and paying less interest!

By managing this carefully over the course of the year, you can achieve your goal of paying down your Flexi Home Loan, so you end up having $30,000 available to redraw.

This is great timing because your $500,000 fixed home loan is now due for review, so we will take the $30,000 and make a lump sum payment onto it before re-fixing.

Now your fixed rate loan balance is $470,000 and you’ll start the pay down cycle again,

Rinse & Repeat!♻️

The beauty of this method is that you can pay lump sums off quickly which will reduce your overall loan balance and therefore the interest costs.

You also have full access to the funds in your Flexi Home Loan facility “just in case” you need it.

Setting up the structure of the Pay Down Cycle Method is best arranged with a Mortgage Adviser as you will need to carefully determine how much extra you can save over the course of 12 months to make it work.

You may even need to extend this out depending on how far you can stretch your budget.

Remember, the right home loan structure can set you on the path to financial security by helping to reduce those interest costs, so take the time to explore your options with a Mortgage Adviser and reach out if you need a hand!

Cheers, Kyle 📲 021 638 464