How Tony and Rhonda paid off their $860,000 home loan in under 6 years and saved $491,113 in interest payments.

The couple implemented a customised and tax effective strategy that allowed them to:

Understandably, Tony and Rhonda were worried about the length of time it would take them to pay off both their new and existing home loans.

Their cash flow was tight, they had just purchased their new home and had not one, but two loans to contend with now. In total they had over $1.5 million in loans to pay back.

They were also paying over $68,294 in income taxes every year, and not only that, there were all the indirect taxes like GST, the fuel excise, stamp duty, and other government levies that they never thought of.

Once everything was said and done, they only had around 40-50% of their original income left to play with.

From there, they still had to cover their living expenses, holidays, the kids' education, private health insurance, car registration, and everything else.

The interesting thing is that the government was taking most of their money and they weren't even aware to what extent.

If they wanted to get ahead in life, they needed to think differently.

They needed to start using the tax strategies the wealthy use to reduce the amount of tax they were paying, and to then use that to pay down their new home loan in a fraction of the time.

And that's exactly what they did.

Tony and Rhonda’s Situation

Tony and Rhonda came to talk to our team back in early 2012. They had just purchased a new home, and they were looking to sell their previous home so they could then use the money to pay down some of the new home loan.

Conventional wisdom would dictate that this was a good idea - but was it?

They wanted to know what, if any, tax implications they faced, and whether this was even a good idea to begin with.

They had initially approached their long-time financial adviser, however much to their dismay, he told them he wasn't qualified to advise them on these matters. He referred them to someone else, and so the merry-go-round of advisers began.

Each adviser they were referred to specialised in one specific area of expertise and no one could agree on one plan that made any sense to Tony and Rhonda. They just couldn't get a straight answer out of the many advisers they consulted with.

That's when one of Tony's friends stepped in and referred them to Tax Effective Accountants.

Shortly thereafter, Tony and Rhonda arranged to come in and see us for an in-depth tax planning consultation.

During the meeting, we uncovered the following about their personal and financial situation:

With this knowledge in hand, we moved on to pinpoint exactly what challenges the couple faced.

The Challenges

Now that we had a clearer picture of the situation, we could begin to understand the challenges facing them, which included the following:

1. The couple didn’t have a strategy in place to reduce the $68,294 they paid in combined income taxes every year

2. Neither of their home loans were structured correctly or tax effectively

3. Their loan repayments totalled $115,939 per annum

4. They didn’t have a plan to reduce their repayments and to free up cash flow

5. With a current net after-tax income of roughly $170,000, this left them with little room to pay the loans, save and build their family wealth (after living expenses)

6. Selling their old home would give them only $79,000 after fees to pay down their new home loan

7. Focusing solely on repaying the new home loan quicker left them with little room to grow their wealth and maximise their returns

And finally, we were in the middle of a flat property market, which would make it even more difficult to obtain a decent return upon selling the old property. Remember they only had around $100,000 in equity on that property - after all loans were paid off.

We needed to act quickly to put them in a better position and ultimately help them better understand how to use their money intelligently.

Before we could move forward, Tony and Rhonda needed to know more about the most tax effective strategies and how they could benefit from them.

They needed to understand that doing the same thing they've always done will only ever get them the same results.

To help them think outside the box, we brought Tony and Rhonda up to speed with some of the latest tax planning practices.

Using Your Money Intelligently

Like most Australians, Tony and Rhonda believed in the traditional way of dealing with debt. They viewed debt as something to get rid of as quickly as possible and believed that all debt was bad debt.

That's why they wanted to sell their old property and use any profit from the sale to reduce their new home loan. After paying down some of the new home loan they then planned to focus on repaying the total loan amount off ASAP.

This was, in many ways, an ineffective strategy for reasons including but not limited to:

• High living costs, home loan repayments and their children's education left them with little surplus income to accelerate their debt reduction strategy in a meaningful way
• A soft property market meant they wouldn't get as much as what they believed their old property was worth, reducing the amount they could pay down on their new loan
• Only focusing on repaying debt meant they dropped the ball when it came to maximising the return on their money

They needed to change their mindset before we could move forward.

They quickly began to see that there is such a thing as good debt, which the wealthy use regularly to help them repay their home loans quicker.

The main point here is that whatever excess funds you have, you should be using in a way that gets you the biggest tax benefit and the greatest return on your money.

This strategy, like many others, works just as well for regular people as it does for the wealthy, because it focuses on using money intelligently rather than just having a lot of it. This educational period helped open the couple's eyes to what was possible with the spare funds they had at their disposal.

Don't always follow the herd. The traditional way is very rarely the most tax effective or efficient way.

They quickly came to understand that by turning their old home into an investment property and restructuring the loan in a tax effective way, they could hold on to it for a minimal cash outlay, and at the same time reap the tax benefits associated with gearing a property.

They were on board with the strategy.

Tax Strategy #1 - Turn Their Old Property Into an Investment Property

Before getting started, we advised them to make two significant changes:

1. Change their old home loan from a principal and interest loan to an interest-only loan.

This lowered their annual repayment of $52,968 per annum by a whopping $11,763. That saving could now go directly towards repaying the non-tax-deductible new home loan.

2. Rent out the old property with the new loan in place.

Once this was in place, our consultants were able to leverage their many years of experience and specialist knowledge to provide them with approximately $51,900 per annum in tax deductions, and once you take the rental income into account, they received on average a $5,050 tax refund each year.

All of this would reduce their ongoing cost of holding the old property to only $7,909 after tax per annum, or as little as $659 per month. And this cost would continue to decrease every year thereafter and as rent increased.

Let's recap - they are now holding a $780,000 asset with a $682,637 debt attached to it, and it's only costing them $659 a month. This is what we mean by good debt.

Now the traditionalists among you may baulk at the idea of keeping a $680,000 investment debt.

But keep in mind that your finances can be used and structured in many ways, and one of those is utilising some types of debt as a tool to leverage your returns.

Tony and Rhonda did just that with their now investment property and reaped plenty of benefits from it.

Did you notice that these figures mean that a mere 1% annual growth in their old property would eliminate the entire $7,909 cost of holding it?

Any growth beyond 1% would result in a profit.

Growth at the annual average rate of approx. 7% would generate a profit of $46,691 in capital growth per annum.

Do you know what the average annual growth for properties in Australia has been over the past 30 years up to 2015?

"Over the past 30 years, Australian housing prices have increased on average by 7.25% per year..."

- Long-run trends in Housing Price Growth
The Reserve Bank of Australia

As you can see, a 7% per annum growth in property value is the norm in Australia. Even double-digit annual growth is very achievable in this country, should you know where to look at what to buy.

For Tony and Rhonda, an average annual growth of 7% would generate a profit of $46,691 in capital growth per annum.

Under a traditional strategy of paying down their home loan, had they put that same $7,909 into their home loan, they would save a paltry $477 in interest payments per annum. This benefit would decrease each year in line with them paying down their loan.

So how intelligently are you using your money right now? Are you getting the maximum return and tax benefit available to you?

This strategy highlights how leveraged debt as a tool could offer massive net benefits over time when structured correctly. Better yet, any surplus savings they made after paying their living expenses could go directly into paying down their non-tax-deductible new home loan.

In addition, they'd be securing a whole world of tax benefits due to the tax effective structuring of this strategy. In essence, Tony and Rhonda unlocked the power of their income tax to help eradicate their new home loan.

And this was only the difference after 1 year. The biggest results kick in over time, which brings us to the final strategy.

Tax Strategy #2 - Giving it Time

Yes, this counts too!

Not many people are willing to do this one simple thing because of concerns about the ever-changing market conditions and the desire to get things done quickly.

But time is a big factor.

And the best things always come to those who wait.

Tony and Rhonda were apprehensive towards this strategy, noting that the market softness worried them, and that the property market could fall even further - wiping out any remaining equity they had in their now investment property.

We told them exactly what we're going to tell you now - market softening is nothing but a short-term cycle, as evidenced throughout the past 100 years of the Australian property market.

We have been doing this long enough to understand that these things will always balance and even themselves out.

The Australian property market has already seen off:

• The sky-high interest rates of the mid to late '80s
• The global stock market crash of '87 and the subsequent asset sell-off
• The recession in the early '90s
• The 9/11 terrorist attacks
• The Iraq War
• The Global Financial Crisis and credit crunch

As a side note, a softer market also offers plenty of opportunities for investors, who can get in while prices are lower and benefit down the track.

Giving it a little time led to huge benefits for Tony and Rhonda.

Just over 5 years after implementing their tax effective strategy, the value of their old property increased from $780,000 to $1.45 million.

Over that entire time, they paid a total of $26,226 to hold onto their old property, which provided them with a gain of $670,000.

Think about that for a moment - they paid on average approximately $437 per month to hold an asset that provided them a capital gain of over $670,000.

Had they chosen to sell the old property and use that same amount of $26,226 to make extra payments into their new home loan, they would have saved a total of $5,549 in interest over the same period - as opposed to making a $670,000 capital gain.

This is what we mean when we ask - are you using your money intelligently?

The traditional strategy would have lost them around $564,451 in capital growth, and they'd still be paying off a huge loan with no real end in sight.

In early 2017, the couple chose to sell their investment property, and together with the extra payments from their surplus cash flow and the after-tax capital gain from the sale of the investment property (which included a much-reduced capital gains tax) they paid off the remainder of their new home loan and became debt free.

They eliminated $860,000 in non-tax-deductible debt in just under 6 years.

That's how much more potent a strategy can be if you're willing to give it the time it needs.

The Results

In partnership with Tax Effective Accountants, Tony and Rhonda achieved the following:

• Repaid an $869,232 loan in less than six years
• Saved $491,113 in unnecessary interest payments
• Claimed huge tax deductions totalling $248,961 over 6 financial years
• Completely freed themselves of non-tax-deductible debt and significantly increased their net surplus savings
• They now also understand how to use their extra cash flow more intelligently

They have laid a strong foundation for building an investment portfolio that will help them secure their financial future even further, which we are working on together now.

Are You Still Following the Herd?

The traditional mentality and strategies are what led to so many of Tony and Rhonda's frustrations.

Had they followed through with that mentality and strategy, they would have paid so much more in interest and tax and would still be facing a massive home loan debt in 2017. They would struggle to afford their costs of living and still send their children to private schools.

Don't do what everyone else does.

The traditional methods for reducing home loan debt are not effective, and there are many other avenues available to you that will help you rapidly reduce your debt while utilising as much of your income tax as possible to help cover your costs.

You need not look any further than what Tony and Rhonda achieved here to see the Tax Effective Accountants difference.

Ask yourself: are you really reaching your full potential?

Has your accountant or adviser been getting you anything like these results?

Are the strategies you're using really working for you?

If not, why wouldn't you try the better alternative?

The Bottom Line

It is possible to repay your home loan 75% faster than everyone else without needing much more money on your end and unlocking your income tax to help fund it.

You just need a targeted strategy that can be tailored for you by great tax and wealth accountants who will go the extra mile and be proactive enough to help you play the game like the wealthy do.

That's where Tax Effective Accountants come in.

We want to work with you to build a tax effective strategy that's designed to help you achieve your financial goals - whether that means repaying a home loan, decreasing tax, starting a portfolio, or all the above - we want to help.