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Are you paying for this home loan pitfall?

All homeowners benefit from home loan flexibility but a staggering 20% of us have used our mortgage as a savings option.

There are times when this is a great option but there are also times when it costs big time.

Of those homeowners who have redrawn from their mortgage or refinanced to borrow more, almost 20% did so to fund private schooling according to news.com.au this week.

Contributing to your home's equity is a great plan; it reduces the interest that you will pay over the life of your loan and reduces the time that you will take to pay it off but borrowing against your house or redrawing funds that you have already contributed thwarts that plan significantly.

Sometimes it's a popular tactic when considering debt consolidation but there's care to be taken.

As a general rule, borrowing from tomorrow to fund today is a flawed strategy; living within your means and preparing for the future should be the goal.

What we're really talking about it a having a financial buffer; enough money to cover unexpected medical treatment or a new hot water service or washing machine. This buffer can be kept within the redraw function of your loan but only if you have saved it for this purpose; any other significant redraw may be costing you lots of money over the life of a loan.

A point to remember is that any changes to house prices can influence what equity you hold; if house prices rise then equity increases, if prices drop then equity drops and this is where eating into your principal can hurt.

The news article that I referred to above is here for more info.