Did you know that if you were to payoff debts and mortgages fast, banks will lose so much money they’d otherwise get from you as interest? Now, that’s the advantage of velocity banking.
Although this concept of velocity banking is not familiar in many countries, places like Australia and the UK have a good percentage of their populace using this strategy to fast track their debt repayments. They, therefore, reduce thousands to be paid in unnecessary interest.
This is basically a loan acceleration concept that you as a mortgage owner can undertake to pay off your dues faster and be free from the burden and the shackles of debt.
Below I will explain how the velocity banking concept works in theory. So let’s dive in!
What is Velocity Banking?
Velocity Banking is also known as the HELOC Strategy. It is a personal finance approach that helps pay off debts/mortgages using the home equity line of credit (Heloc).
It uses HELOC to pay off debts faster instead of the traditional monthly repayment with only your earnings.
Normally, a bank can loan up to 80-90% combined loan the value of a mortgage depending on your credit and if your property has sufficient equity, you will borrow enough to pay your monthly expenses.
But, with velocity banking, you will use the credit line as an operating account to pay the monthly expenses. This is similar to a checking account, but you would still have access to emergency purchase funds since you are leveraging an equity line.
Depending on how you use this strategy, you can quickly pay off debts within 5-10 years. Well, this depends on the amount of the loan.
Essentially, the HELOC strategy helps with cash flow management.
The result of Velocity Banking is that your cash flow is directed into home equity, where it is stored.
How Does Velocity Banking Work?
Velocity banking uses the HELOC principles to reduce your borrowing cost. In theory, this is how velocity banking works:
You apply for a home equity line of credit (HELOC) or any other line of credit available.
Upon approval, open the HELOC, drawdown almost the entire line of credit. It is even advised to leave some untapped line of credit in case of emergencies to pay off/down balances of the debt.
When you receive your paycheck, use 100% of it to pay down your HELOC.
Actually, you deposit a paycheck into your HELOC instead of into your checking account. While some people will deposit the paycheck into a checking account then make a manual transfer to the HELOC account.
After making the payment on HELOC with the paycheck, you will also make a payment towards your debts with the new credit line you obtained.
Velocity banking saves you money because HELOC charges interest based on its average daily balance throughout the month. The required payment you make to the HELOC is only the interest, and that interest calculation is simply the balance of the HELOC.
Using velocity banking to pay unsecured/high-interest debts is a viable way to reduce and eliminate debts much faster than the traditional method of making payments on them.
What Are the Benefits of Velocity Banking?
1. Quick debt reduction
Velocity banking helps you pay off those mortgage/debts faster than you would have easily done.
2. Increase in monthly cash flow
Once the debts are paid off fast, you are on your way to freeing up cash and having an increase in cash flow.
3. Reduction in stress level
Once your mortgages are being paid for, the stress level will reduce and that extra job you took may be dropped.
4. Creating financial independence
Now you can even use debt to your aid and take advantage of leverage to build on your assets and thus create financial independence.
If you are disciplined with your personal finances and have disposable income, this is an excellent way to get out of debt. Paying down your mortgage will save you thousands in interest, and can help you retire earlier.
Disadvantages of Velocity Banking
- Your Credit score takes a hit: You need a good credit score to signup on LOC. Whenever you withdraw (also called chunking) money from LOC, your credit score will go down. However, the more you use this tool, the less fluctuation your credit score will have.
- You are not in control of your cash flow: If you don’t have enough money left over after paying for expenses and bills, you will struggle. Besides, velocity banking needs a positive cash flow system to work.
- You are not disciplined with money: You cannot be allowed to withdraw money from your LOC to fund your lifestyle needs. Only take the money out when absolutely necessary. Being disciplined here helps make interest payments faster and reduce the debt quicker.
It is time to stop repaying both the interest and principal for your debts to banks. The structure of mortgage repayment is such a way that the bank controls your lifestyle. In fact, the interest is almost equivalent to the principal when calculated over a long period of time.
Don’t let that happen to you. Be financially savvy and take steps to quickly pay off your debt and live the lifestyle you’ve so craved for.
Learning to use velocity banking to your advantage. It is crucial for financial independence.