Returning to Australia after living abroad is an exciting journey, but it also comes with its fair share of financial challenges. As you settle back into life Down Under, one of the most important aspects to consider is optimising your home loan to ensure financial stability and efficiency.

Here are six essential home loan tips to help you navigate this transition smoothly.

1. Consider Converting Investment Loans to Interest Only

When you move back to Australia, it's crucial to evaluate your existing investment loans and consider converting them to interest-only loans. This strategy can offer several benefits that can enhance your financial situation.

Understanding Interest-Only Loans

Interest-only loans allow you to pay only the interest on your loan for a set period, typically five to ten years. During this time, your monthly repayments are significantly lower than they would be with a principal-and-interest loan.

Benefits of Interest-Only Loans

One of the primary advantages of interest-only loans is the increase in cash flow. By reducing your monthly repayment obligations, you can free up funds for other investments or expenses that might arise during your transition back to Australia.

Tax Efficiency

For investment properties, the interest payments on your loan are generally tax-deductible. By converting to an interest-only loan, you maximise the deductible interest, potentially reducing your taxable income and improving your overall tax efficiency. It’s important to seek tax advice from your accountant / tax adviser to consider what is right for you here.

When to Consider Switching

While the benefits are clear, it's important to evaluate whether switching to an interest-only loan aligns with your long-term financial goals. Consider the interest rates and the duration of the interest-only period. If you plan to sell the investment property or significantly increase its value within the interest-only term, this strategy can be highly beneficial.

2. Increase Frequency of Repayments to Non-Deductible Debt

Managing your non-deductible debt, such as your personal home loan, should be a priority upon returning to Australia. One effective strategy is to increase the frequency of your repayments, which can lead to significant savings in the long run.

Why Focus on Non-Deductible Debt?

Non-deductible debt refers to loans where the interest payments are not tax-deductible, such as your mortgage on your primary residence. Reducing this type of debt as quickly as possible can save you a substantial amount in interest payments over the life of the loan.

Benefits of Increased Repayment Frequency

Increasing the frequency of your repayments means you're paying off the principal faster. This reduces the amount of interest charged over time. For example, switching from monthly to bi-weekly or weekly repayments can lead to considerable interest savings.

How to Implement More Frequent Repayments

Contact your lender to discuss options for increasing your repayment frequency. Many lenders allow you to make bi-weekly or even weekly payments instead of the standard monthly payments. Even small adjustments can make a big difference over the long term.

3. Set Up Offset Accounts

An offset account can be a powerful tool in reducing the interest payable on your home loan. It's a simple yet effective strategy that can save you money and provide flexibility in managing your finances.

What is an Offset Account?

An offset account is a transaction account linked to your home loan. The balance in this account offsets the amount owed on your loan, reducing the interest you pay. For example, if you have a $500,000 home loan and $50,000 in your offset account, you only pay interest on $450,000.

Benefits of Offset Accounts

The primary benefit of an offset account is the reduction in interest payments. By keeping your savings in the offset account, you can significantly reduce the total interest paid over the life of the loan.

Flexibility and Accessibility

Offset accounts offer the flexibility of having access to your funds whenever needed. Unlike making extra repayments directly to your loan, which might be difficult to access later, an offset account allows you to use the funds for emergencies or other financial needs while still reducing your loan interest.

To maximise the benefits of an offset account, you may wish to keep as much money as possible in the account. Consider using it for your salary deposits, savings, and any other funds you can spare. The more money you keep in the offset account, the more interest you'll save.

4. Convert Your Primary Residence Loan to Owner Occupied

If you've been renting out your home while living abroad, you might have your home loan categorised as an investment loan. Upon returning to Australia and moving back into your home, it's advantageous to convert your loan to an owner-occupied loan.

Difference Between Investment and Owner-Occupied Loans

Investment loans typically come with higher interest rates compared to owner-occupied loans. This is because lenders perceive investment properties as higher risk. By converting your loan to an owner-occupied loan, you can take advantage of lower interest rates.

Steps to Convert Your Loan

To convert your loan, contact your lender and inform them of your change in circumstances. You'll need to provide evidence that the property is now your primary residence. This could include utility bills, a driver's license update, or other documentation showing your new address.

The primary benefit of converting to an owner-occupied loan is the potential savings from lower interest rates. Over the life of the loan, this can add up to significant savings, reducing your financial burden and helping you manage your finances more effectively.

5. Consider Extending Loan Terms of Investment Properties

Extending the loan term on your investment properties can be a strategic move to improve your cash flow and align your loan repayments with your long-term financial goals.

Benefits of Extending Loan Terms

By extending the loan term, you lower your monthly repayments. This can be particularly beneficial if you're looking to improve your cash flow, either to invest in other opportunities or to manage other expenses associated with your return to Australia.

Evaluating the Long-Term Impact

While extending the loan term reduces your monthly repayments, it's important to consider the long-term impact. Over a longer loan term, you'll pay more in total interest. It's a balance between immediate cash flow benefits and the overall cost of the loan.

When It Makes Sense

Extending the loan term can be especially useful if you have multiple financial goals or commitments upon your return. For instance, if you need funds for setting up your home, children's education, or other investments, lower monthly repayments can provide the necessary financial flexibility.

6. Refinance to Take Advantage of Better Rates

Refinancing your home loan can be a highly effective strategy to secure better interest rates and loan terms, providing significant savings and improved financial stability.

Understanding the Refinancing Process

Refinancing involves replacing your current loan with a new one, usually with a different lender offering more favourable terms. The process includes assessing your current loan, comparing new loan options, and applying for the new loan.

Benefits of Refinancing

The primary benefit of refinancing is the potential to secure a lower interest rate. This can reduce your monthly repayments and save you a substantial amount over the life of the loan. Additionally, refinancing can allow you to switch to a loan with features that better suit your needs, such as fixed rates or an offset account.

To ensure a successful refinance, maintain a good credit score, gather necessary documentation, and shop around with your mortgage broker for the best rates and terms. Consulting with a mortgage broker can also provide valuable insights and help you navigate the refinancing process efficiently.

Conclusion

Returning to Australia and managing your home loan doesn't have to be daunting. By considering these six tips – converting investment loans to interest-only, increasing repayment frequency on non-deductible debt, setting up offset accounts, converting your primary residence loan to owner-occupied, extending loan terms for investment properties, and refinancing – you can optimize your financial situation and ensure a smoother transition. Each of these strategies offers unique benefits that can help you manage your finances more effectively and make the most of your return to Australia.

If you have any questions or need personalised advice, feel free to reach out for a complimentary consultation. Our team is here to help you navigate your home loan options and make the best financial decisions for your future.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.