Tax refunds home brew

Published in the Herald Sun, July 2007 by Anthony Black

Home loan borrowers can save thousands of dollars by using income tax refunds to reduce debt.

Financial services provider Infochoice.com.au said a $1500 refund contributed to the mortgage would save borrowers $8100 on a $250,000 loan at an interest rate of 7.5 per cent over 25 years. And it would reduce the term of the loan by five months.

Even contributing modest tax cuts, which took effect on July 1, would significantly eat into a $250,000 mortgage over a 25-year term at 7.5 per cent.

The National Tax & Accountants Association said people on about $48,000 a year had received a tax cut of about $14.40 a week.

Infochoice calculated that people who contributed an additional $14.40 a week to a $250,000 mortgage would save $31,100 in interest over 25 years and reduce the term of their loan by two years and a month.

Experts said reducing debt should be the first priority for struggling families.

They said taking disciplined measures now would at least provide a buffer if interest rates rose.

New products constantly introduced to the market amid stiff financial institution competition were providing customers with greater choice.

Experts said households should find suitable accounts in a bid to collectively reduce annual bank fees of $4 billion.

Dale Gillham, of Wealth Within, welcomed BankWest's plan to open 160 new branches on the east coast during the next four years.

"It also announced it would lower fees in an effort to undercut the other banks and take business from them," Mr Gillham said.

"It is about time someone took on the major banks because for too long consumers have been paying more and more in fees while the service they have been receiving is diminishing."

Denis Orrock, of Infochoice, said struggling families should attack the debt with the highest interest rate. Usually this was credit cards.

Mr Orrock said credit card users should not pay more than 10 per cent interest on outstanding amounts.

He said financial institutions were offering credit card interest rates of between 8.49 per cent and 9.5 per cent in response to fierce competition.

Body: Those struggling on higher interest rates should immediately apply for a lower-rate card.

Australia's credit card debt of $39.6 billion prompted a response from the State Minister for Consumer Affairs Daniel Andrews.

"This translates to average debt of $2933 per credit card," he said.

"Most Victorians don't realise that by making monthly minimum repayments on a $3000 credit card debt it will take almost 19 years to pay off."

Mr Orrock said home loan borrowers could save tens of thousands of dollars by switching to a lower variable interest rate.

He said steep exit fees were generally attached to new home loans for up to five years, so borrowers needed to examine their situations.

"Switching home loan lenders is about getting a better deal," he said. "Switching lenders too often could leave you worse off because of the fees."

Mr Orrock said bank customers should look for the most suitable products from all institutions.

He said banking with one institution might be convenient, but not necessarily the most cost-effective. An institution might offer top credit card deals, but paid little interest on savings.

Mr Orrock said online savings accounts attracted the best interest rates of up to 7 per cent and minimal to no fees.

"If you're saving for a home loan deposit, go online," he said.