A client of mine, who we shall call Bob, earned an obscenely high amount of income, he drove a brand new BMW, always wore nice Italian suits and travelled overseas at least twice a year. Ignoring stereotypes, Bob was actually a very down to earth, genuine nice guy but terrible with money.
Some years ago, he was advised to change his home loan to a revolving line of credit and open a credit card. He was to put his salary into the line of credit and spend on the credit card. At the end of the month he would transfer the credit card balance in full from the line of credit thus avoiding interest on the credit card and saving $100’s in interest on the home loan during the month.
This sounds great in theory however the one big flaw was the credit card limit the adviser gave Bob. The limit on Bob’s credit card equalled his net monthly income so Bob being the spendthrift he was, blew his credit card limit every month and surprise surprise Bob’s home loan balance never reduced a cent in over 5yrs.
To solve Bob’s problem, we first changed his home loan to a term loan with principal and interest repayments. Not only did this give Bob a firm structure and plan to reduce his loan balance he also saved a bit of interest in the process as revolving line of credit facilities are more expensive.
Secondly, we found a loan that had a full 100% offset included. When used properly, this feature has the same benefit as a line of credit but forces the loan to reduce to zero after 30yrs.
Finally, we reviewed Bob’s household budget and reduced his credit card limit to equal his monthly expenses not his monthly income.
Utilising the same strategy as the previous adviser but with a different product and credit card limit in place Bob can now actually start paying his loan off sooner.
I would like to report that Bob has paid his loan off in under 5yrs but that would be a lie. Bob couldn’t help himself and continues to spend like crazy but at least now his loan is reducing every month and each month he is building more and more equity in his home in the hope that one day, he will spend his money on something more useful, like an investment property perhaps!
