Most mortgages are spread out over 25 to 30 years, but it doesn’t have to be that way. With a few simple strategies you can take years and thousands off your loan, and it’s much easier than you might think.
Everyone would love to have no home loan, but a mortgage is part of life for the majority of us. Obviously, the faster you pay it off, the sooner you’ll be free to use your money to get a bit more out of life.
The basic tip is to attack your principal. By paying more off more of what you have to, you’re reducing your debt faster, while at the same time reducing the interest that’s charged. The money you save on interest can be used to make further payments on the principal.
Sounds simple, right? Well it’s a lot easier said than done. But follow a few of these tips and you’ll find it easier to say goodbye to your home loan.
Shop around for the right loan
You have to live with it, so it should suit you. It goes without saying that a low interest rate is important, but it’s not everything. Considering other features, fees and charges can also make a big difference.
- Be wary of ‘honeymoon’ loans. Some lenders will offer an attractive low interest rate for the first one or two years. After that, they’ll hike up rates and use high exit charges to stop you leaving. Look at the long-term cost of the loan.
- Consider a 100% off-set account or facility. These day-to-day transaction accounts are linked to your home loan, and any balance is considered as a reduction in your loan, which reduces your interest. Even if it’s only there for a short time, it makes a difference. By having your salary or wages paid into this account, you’ll get a regular knock down in the amount you owe.
- Split your loan. This is a good way to protect yourself against rate rises and extra interest payments. Keep one part of your loan at a variable rate and lock the other in at a low fixed rate for a period of time. If rates go down, your variable loan’s rate will too. If rates go up, you’re protected because your fixed loan is at a lower rate. It’s a bet each way.
- Look for features to help you save. In order to pay more off your loan, it’s a good idea to reduce your living costs in other areas. Many loans and lenders have other products that will help you do just that. If you have a loan with a lender, you can often get discounts on life insurance, car insurance, home and contents insurance, and more. Alternatively, another way to save is to choose a loan with less features. These ‘no-frills’ loans often sacrifice features for lower rates. If you don’t need the added extras this could suit you.
Navigating the ins and outs of all the loans on offer and comparing them is never easy. It’s a good idea to make full use of a broker’s expertise and I will be more than happy to do the hard work for you.
Every little bit counts
It’s remarkable what a large long-term difference a small extra amount can make. For example, $100 extra per month on a 30-year $400,000 loan at 5.5 per cent will take 2 years and 9 months off the loan and save almost $45,000 in interest.
A simple way to make these extra payments is to ’round up’. If your monthly payment is $2,240, round it up to $2,300. And it shouldn’t be hard to find $60 per month. It’s a current cliché to say “buy one less coffee” or “cut back on the avocados”, but the principle is right. A few small daily savings can save you big dollars.
Pay fortnightly instead of monthly
This is not simply cutting your monthly payments into two smaller and more manageable amounts. There are 12 months in the year and 26 fortnights. So when you pay fortnightly you’re effectively creating an extra ’13th month’. It’s pretty easy to see how that extra month will put you in front.
Make the most of a lump sum
Lump sums are free money! Not really, but a payment like a tax refund is cash that you’ve never really had. You’ve already lived without it, so you won’t miss it when you put it into your loan. And you certainly won’t miss the extra months of payments and thousands in extra interest you’ll still have if you don’t pay it. And this is just one single payment. Imagine how much you’d save if you paid your tax refund into your loan every year.
Review and refinance
Things change. Rates go up and down, you may get a different job or have another child, and new loan products are constantly introduced to the market. So it’s always a good idea to take stock of your loan and see if you can get something more suited to your current needs and goals. Maybe it’s a lower interest rate, or some extra features. You may even be thinking about splitting your loan. Whatever the reason, sometimes switching lenders or refinancing is a good strategy.
One last tip
You’ve got me onside for a reason. Make it a habit to do a home loan health check once a year to make sure your loan is still right for you. The simplest way to do this is to speak to me – that is what I am here for.
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.