Explanation of Australian Mortgages

An Australian mortgage is a type of mortgage that is designed to help you pay off your mortgage loan faster than the typical mortgage. If used properly, you could potentially pay off your mortgage in a third of the time that it takes to pay off a traditional mortgage. This type of mortgage has several benefits and is becoming more common in the United States. Here are the basics of Australian mortgages and how they are used.

How It Works

This type of mortgage is also sometimes referred to as an offset mortgage. In most cases, the actual mortgage itself is a home-equity line of credit. However, instead of using the home-equity line of credit as a second mortgage, the individual uses it as a primary mortgage.

The borrower will deposit all of their money into the home-equity line of credit. This account will replace your checking account and your savings account. All of the extra money that you earn will go directly into the home-equity line of credit. Then, when you need money for anything, you will take it out of the home-equity line of credit. You will use this account to purchase groceries, gas, utilities and pay any other expenses that you have.

You should try to leave as much of your money as possible in the account because you will be able to significantly decrease the principal of the loan balance. When the interest for the month is calculated, it will be much less than what it would have been otherwise. By doing this, you are going to be able to lower your mortgage payment and lower the amount of interest that is due on the loan.

Tax Advantages

An Australian mortgage can provide you with tax advantages. Since you are using your savings to reduce your interest rate, you will basically be receiving tax-free income. If you instead used that money to invest, you would have to pay income taxes on the amount of interest that you earned. However, when you are using the same money to reduce your interest rate, you will not have to pay taxes on the money.

Who Should Use

Even though this type of mortgage can be very beneficial, it is not for everyone. The individual who should utilize Australian mortgages is someone who is financially disciplined. In most cases, it helps to have a higher than average income as well. This way, your mortgage balance will be paid down even more every month.

If you are the type of person that cannot control your spending, this type of mortgage could get you in trouble. You may find yourself spending more money than you have out of the home-equity line of credit account. If financial discipline is not your strong suit, do not tempt yourself with this type of mortgage because there is too much to risk.

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