In many countries now there are various types of home loans available to the purchaser of a home and in particular if you are a first time home buyer. Variable rates, fixed rates and interest only are just some of the loans available and each has a place in the system and give benefits to the purchaser. For example right now interest rates are low because of the Global Financial Crisis and so the best deal around at the moment is to lock in these low interest rates with a fixed interest loan. As interest rates inevitably go higher your mortgage interest rate will remain at today’s low rate.

Some lenders offer the option of making a 1% interest payment and at first glance most people reject this option outright because every month the borrowed amount is increasing. There is nothing being paid off the capital amount and interest is being added every month and so the mortgage will never be paid off at this rate. It is advisable to talk to your accountant or financial adviser about this type of payment arrangement because it can be very beneficial to you.

In some circumstances, the increase in your outstanding amount each month is of course interest, and this interest amount can become a tax deduction. If your regular mortgage payment is $2,400 each month and the 1% option payment is $1,000 then the $1,400 you save each month should be deposited into a savings account and let run for about 5 years when you would have around $100,000 saved to pay off your mortgage. Everybody’s circumstances are different and your financial adviser can detail a plan ideal for you. It may well be that you can benefit best by paying a chunk off your mortgage and claiming the tax deduction each year. While someone else may be best advised to wait a longer period.

I personally am of the opinion that the deferred interest should never exceed the value that your house is increasing each month. In other words if your house value increases $2,000 each month then it would be a workable situation to have deferred interest of $1,400 each month because the mortgage is staying relative to the house value. If house values start to decline you should quickly stop deferring interest and reduce the capital loan as fast as possible.

Having equity in your home is certainly something to desire, however, the investment return on home equity is zero. And the only way to benefit from having equity in your home is to sell the home or take out a further mortgage on your home. So it makes sense to forego a part of the equity in your home each month and convert it into a tax deduction. In this way you will have the cash savings that you are banking each month and you will also have some equity and a sizeable tax deduction.

A little trick that I learnt with my mortgage is to stop making the payments monthly and pay weekly or every two weeks and this can reduce the time it takes to repay your mortgage by many years – in some cases 10 years or more. Speak to your banker and make sure they will accept a changed payment schedule and then have the payment deducted from your account automatically. You will never notice the difference from your weekly budget but because interest on your mortgage is charged daily you are significantly reducing the interest charged on your account.

Another valuable tip that I discovered is that my loan was connected to an index and my interest varied in line with that index, I found that I could choose the index and that some of the choices moved a lot slower than others. The Monthly Treasury Average Index was the one that I chose because it seemed the slowest to move over a period of time.

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