Expecting a decent tax refund this new financial year? Hold off on cashing it in for a short-term reward, as you may want to consider putting it into your mortgage instead.
According to the AFR, last year the Australian Taxation Office (ATO) received returns from 13 million taxpayers reporting income of about $827 billion. And a New Daily article revealed that the ATO has since paid out more than 10.88 million individual refunds for the 2019-20 financial year, with a payout of $2,800 on average.
The AFR also noted that the ATO found the number of Australians claiming work-from-home expenses increased by over one-third to 4.42 million due to restrictions enforced off the back of COVID-19. Given many employers are still not back to full-time working offices this number may increase, and so too may the amount expected to be handed out in tax refunds.
So, whether you’ve taken advantage of all the work-from-home deductions or have overpaid in tax for the last financial year, being given an unexpected lump sum is a great feeling. However, by injecting that windfall into your home loan, you may be able to turn a $2,800 refund into an additional $2,415 in savings.
The benefits of additional repayments
It goes without saying that making more than the minimum repayments on any debt, be it home loan, credit card or other, may help to pay it off faster. And your mortgage is no exception. This is where making an extra repayment with your tax refund comes in.
Not every home loan provider will allow borrowers to make additional repayments, and some may even charge a penalty for doing so, so be sure to check before you proceed. Some lenders may only offer this feature for borrowers on a variable home loan rate. Reduce Home Loans offers the flexibility of being able to make extra repayments across all its loan products – including fixed home loans.
Put simply, making additional repayments on your mortgage helps to reduce the principal amount owing. In doing so, not only may you pay off your mortgage faster than the original loan term, but you may also reduce the amount of interest charged over the life of the loan. As interest is charged on top of the principal, a smaller principal amount means less interest to pay.
Let’s say hypothetically a home loan customer who is 5 years into repaying a $400,000 mortgage at a rate of 2.5 per cent gets a tax refund of $2,800 this year. If they put that lump sum into their mortgage, they would shave 2 months off their loan term and save $2,415 in interest repayments. And this may only increase if the borrower were to do so every financial year. (Note: hypothetical example used for demonstration, does not factor in rate fluctuations or fees.)
The benefits of an offset account or redraw facility
Perhaps you don’t want to put your lump sum directly into the mortgage and you want the opportunity to use those funds in case of emergency or on a rainy day. You may be able to have your cake and eat it too with home loan features like an offset account or a redraw facility. These features may come in handy and help you reduce your mortgage repayments as well as let you access said tax refund if the need was there.
An offset account works by allowing borrowers deposit funds into the account, just like a bank or savings account, while the balance ‘offsets’ their mortgage. This can help reduce the ongoing mortgage repayments and therefore decrease the total interest charged over the life of the loan.
For example, on a $400,000 mortgage, an offset account with $20,000 in it would see a lender calculate your repayments as if the mortgage were $380,000 instead. And even with a smaller deposit of $2,800 in the offset account, your repayments may be based as if you were a whole extra month or two ahead on your mortgage (depending on your regular repayment amount).
A redraw facility is similar but instead works with the extra repayments you make along the life of the loan. The extra repayments will help reduce the principal amount owing, but the redraw facility means you can draw down and access these additional payments if needed. Keep in mind some lenders put a cap on how much you can withdraw, so do your research before considering this option.
If you were to put your tax refund into an offset account, or make a lump-sum additional repayment knowing you have a redraw facility, you may be able to reduce your ongoing mortgage repayments and still be able to spend the refund if you wanted to. And with interest rates at record lows at the moment, the amount of interest you save on your mortgage may be greater than the amount you’d earn by depositing it into a savings account.
How do I calculate what I may save on my mortgage with a tax refund?
If you’ve already received a tax refund or you have an estimate of how much you may receive, you can calculate how much this may save you in time and money by using Reduce Home Loan’s Mortgage Offset Calculator.
Simply enter your current home loan details, how long into the mortgage you are and how much you will deposit as a one-off lump sum. Then you will be able to see exactly how much you may save for your personal financial situation.
And if this has inspired you to keep making extra repayments into your mortgage, you can also calculate these potential savings through Reduce Home Loan’s Extra Repayment Calculator. Making regular, additional repayments may help to speed up the process if you’re hoping to pay off your loan before the standard 25-30 year term.
If your current home loan lender does not offer any of these helpful features, it may be worth considering refinancing to one that does. Reduce Home Loans allows for extra repayments across all of its loan products, including fixed rate loans – which traditionally may not come with this feature. Plus, a majority of Reduce Home Loans mortgages offer an offset account and/or a redraw facility.
Don’t let your tax return burn a hole in your back pocket this new financial year 2021-22, consider putting it into your mortgage to potentially save on time and repayments.