I regularly see clients who for years have driven their home mortgage down by paying higher repayments than the minimum payments required.
While on the surface this seems like a great idea, there are circumtances where it can come back to 'bite you on the bum'.
A met with a client this week who had made advance payments of approximately $150,000 off their home loan. However this year they are moving and plan to rent out the current home and purchasing a replacement home in a new area. Re-drawing the advance payments made against the home loan would mean that that portion of the home loan would be private in nature and therefore the interest is not deductible against the rental income earned.
A better strategy is the use of an offset account. This means that rather than putting your extra income off your home loan, you arrange with your bank to open a separate offset account. This means your interest on the loan is reduced, and has the added advantage that if down the track you decide to move and keep your home as a rental property, you can take the money out of the offset account, to use for the purchase of your replacement home, and the original nature of the home loan is kept and the interest claimable maximised.
If there is any chance that you may rent your home in the future, you should speak to your bank about setting up an offset account today!