Financial Planners - worth paying off HECS debt?

[Merlin]

Need some financial planning advice from any accountants on here. I was going to go to a financial planner, but I think it is a relatively simple question that could save me some $$$ over a planner. Any advice appreciated.

I bought a house a couple of years ago and my wife and I put all our income into the mortgage then just redraw it when needed to pay bills ect. So far we have managed to pay an extra $12K off the mortgage so this $12K is now available on redraw (no fees for redraw). I also have a HECS debt of $11K.

Spoke to the ATO and I am currently losing $336 a month from my take home pay which automatically goes towards HECS repayments.

So am I better off continuing to pay as much as I can into the mortgage (interest rate is 7.1%) and take home a lower pay or should I pay off my $11K HECS debt (interest is 2.8%) and then put the extra $336 a month into the home loan as well.

[Rate]

I'm not an accountant or financial planner but I think the interest rates say it all.

[Ako]

I am an accountant, but not a financial planner, and my wife and I have the same problem. She has a HEC's debt, and we have a home loan. As you have mentioned, the HEC's debt has a rate of 2.8%, while the home loan is considerably higher.

If you paid off your hec's debt, then it will cost you another 4.3% for this $11,000 against if you were to leave it in against your home loan and only pay the minimum of your HEC debt.

Do a little spreadsheet on Excel, the results with explain themselves.

Bugger it, I am using the government's low interest rate money for as long as I can. I will I could draw more and pay down my home loan :lol:

[QIKMIK]

If you pay off you HECS Debt in a lump sum, you get a 25% discount. Used to be that way but you should check the ATO to be sure.

Mick

[NickS]

If you pay off you HECS Debt in a lump sum, you get a 25% discount. Used to be that way but you should check the ATO to be sure.

Mick

The lump sum payment bonus is only about 9% ...

I recommend leaving it as long as you can, but in the year that it will be repaid in full through the normal repayment when you lodge your tax return, clear it with a lump sum payment first !!! That way you get a discount on the final payment, the extra tax that was taken out will all come back in your refund and you won't be any worse off as it would have been cleared anyway.

As others have said, use the ATO's generous interest rate for as long as possible !!!

:cheers:

[Merlin]

If you pay off you HECS Debt in a lump sum, you get a 25% discount. Used to be that way but you should check the ATO to be sure.

Mick

Its currently a 10% discount.

Hmm I was leaning to keeping the debt, the wife wants it paid off her argument being that my take home pay would be a lot higher and hence could (in her head anyway) pay off the home loan faster in the long term.

[Ryzz]

If you pay off you HECS Debt in a lump sum, you get a 25% discount. Used to be that way but you should check the ATO to be sure.

Mick

Its now only 10%, see page 24 Here (http://www.ato.gov.au/content/downloads/n3913.pdf)

[dogsballs]

geez, only $11k, mines $26k , well thats what happens when you live overseas for a while and don't pay it :lol: :(

[NickS]

Guys ... just so you know, the ATO's definition of a 10% discount is different to yours and mine !!!

The reason I said that it's about 9% is the ATO gives you a discount of 10% of the amount you pay AFTER the discount ... confusing hey. e.g. Your debt is $11000 exactly, they give you a discount of $1000 and you pay $10000 ... the discount of $1000 is 10% of the $10000 you end up paying, but it's 9.09% of the actual debt of $11000.

To work out what you will get as a discount divide your debt by 11 ... that will give you the answer.

:cheers:


... the wife wants it paid off her argument being that my take home pay would be a lot higher and hence could (in her head anyway) pay off the home loan faster in the long term.

You will pay an extra $400 - $500 in interest (in year 1 ... less in year 2 etc.) if you draw against your home loan to pay off the debt. Offset this against the fact that you will get a $1000 discount if you pay it off with a lumnp sum and you have about 2 years to break even. Without knowing what your income is and hence at what rate you will have to repay the HECS debt through the tax system, it's impossible to say which option is better.

If you will pay it off through tax in 2 - 4 years anyway it's highly likely it wouldn't make any difference. 2 years or less, pay it off ... 4 years or more, don't. In between, if it makes the wife happier, just do it.

:D

[GTO LS2]

The reason I said that it's about 9% is the ATO gives you a discount of 10% of the amount you pay AFTER the discount ... confusing hey. e.g. Your debt is $11000 exactly, they give you a discount of $1000 and you pay $10000 ... the discount of $1000 is 10% of the $10000 you end up paying, but it's 9.09% of the actual debt of $11000.

To work out what you will get as a discount divide your debt by 11 ... that will give you the answer.


Fairly GST ish really:)

[NickS]

Fairly GST ish really:)

:lol: Just a little ... it used to be a 15% discount (calculated the same ridiculous way) but I think the ATO couldn't handle more than one system so the changed it to 10% so it matched the GST. :confused:

[GTO LS2]

Just a little ... it used to be a 15% discount (calculated the same ridiculous way) but I think the ATO couldn't handle more than one system so the changed it to 10% so it matched the GST.

Cant go confusing the Pubes at the ATO:shiner:

To go back to the original question and response so far.............. If getting low rate Guvmt money...... leave it............ a simple method for debt repayment is the higher the rate the sooner you should pay it off..............

The only time this may becomes a "grey" area is if it was tax deductable debt or it could be payed with pre tax dollars................

And no I am not an accountant or financial planner either..... but i like to think I have some idea:yup: :yup:

[clixanup]

So am I better off continuing to pay as much as I can into the mortgage (interest rate is 7.1%) and take home a lower pay or should I pay off my $11K HECS debt (interest is 2.8%) and then put the extra $336 a month into the home loan as well.
Simple maths really.

Paying $336/month, it'll take until around August 2009 to pay off $11,000 @ 2.8%, by which time the interest will have been ~ $600.

In order to properly work out what it'd cost on your home loan, you'd need to consider the current balance and your monthly repayments. Purely on a straight line basis (without having more info on hand), the interest on your $11K redraw could come to ~$2K over the same timeframe.

Even taking the 10% saving for upfront payment into account, you could still be $400 worse off by the end of August 2009 if you redraw on the mortgage.

Of course, there are other factors at play, which could mean that that ending position could easily be reversed. :yup:

[NickS]

In order to properly work out what it'd cost on your home loan, you'd need to consider the current balance and your monthly repayments. Purely on a straight line basis (without having more info on hand), the interest on your $11K redraw could come to ~$2K over the same timeframe.

That's true ... straight line with no extra repayments. But if you put the extra $336 a month of the home loan the interest on the additional $10000 (with the discount you only need to pay off $10000, not $11000) is only $1000 over the same period. If you have HECS deducted at $336 a month you will actually be better off drawing down on your home loan, taking the discount and putting the $336 a month against the home loan. As your ATO discount will match the bank interest (as long as you put the extra into the loan) your saving will be whatever the ATO would have indexed the loan by over the next 3 years or so.

[Merlin]

That's true ... straight line with no extra repayments. But if you put the extra $336 a month of the home loan the interest on the additional $10000 (with the discount you only need to pay off $10000, not $11000) is only $1000 over the same period. If you have HECS deducted at $336 a month you will actually be better off drawing down on your home loan, taking the discount and putting the $336 a month against the home loan. As your ATO discount will match the bank interest (as long as you put the extra into the loan) your saving will be whatever the ATO would have indexed the loan by over the next 3 years or so.

NickS your mking my head hurt! But I appreciate the advice - you and everyone so far. :)

To add some other numbers to the fray to help out with the calculations - I owe $330K on the mortgage at 7.1% over a 30 year loan (in year 3 at the moment). Currently earning $63K + super so my current HECS rate is 7%. To further add confusion I get a 4% payrise on that $63K every 6 months for the next 5 years guaranteed.

Riddle me that batman.

[NickS]

NickS your mking my head hurt! But I appreciate the advice - you and everyone so far. :)

Sorry for the brain strain ...

Based on your extra information your repayments will increase pretty quickly, up to 8% of income within 12 months. In this case you will have it paid off through the tax system in a little over 2 years.

My recommendation is to take the discount now and bump up your mortgage payments as much as you can. The additional interest on the mortgage will be less than the discount so you will be ahead in $$$ terms ... plus the Mrs will be happy and you can't put a price on that. :lol:

This is all reliant on you sticking the extra funds into the mortgage !!!

:cheers:

[clixanup]

To add some other numbers to the fray to help out with the calculations - I owe $330K on the mortgage at 7.1% over a 30 year loan (in year 3 at the moment).
It depends upon the monthly repayments you're making. Re-drawing $10K will increase your minimum monthly payment by ~$70 per month at your current interest rate.

[EXCESSV]

i too have a $11K hecs debt and instead of seeing a refund cheque of $2500 i saw one for $230 coz the ATO wanted a lump sum...:flipoff: as if $155 a fortnight aint enough :shiner:

anyway....my accountant and financial planner said its best to leave it and pay itself off via fortnightly deductions and end of financial year lump sum payments because the low interest rate.

i have been concentrating on my *cough* jetski loan *cough* and *cough* HSV loan *cough* as they have higher interests rates than the 2.8% hecs one....

hey you gotta have your toys....:bravo: :yup: :bravo:

[clixanup]

anyway....my accountant and financial planner said its best to leave it and pay itself off via fortnightly deductions and end of financial year lump sum payments because the low interest rate.

i have been concentrating on my *cough* jetski loan *cough* and *cough* HSV loan *cough* as they have higher interests rates than the 2.8% hecs one....
Good. I think you're doing the right thing. Everyone's circumstances are different. Long term mortgages can change things drastically.

hey you gotta have your toys....
Agreed. I wish I could've afforded your lifestyle when I was 22!!