Most home-owners’ main goal is to pay off their mortgage. Having the debt on your owner-occupied home paid off opens up cashflow and eases up pressure on the income earners of the household (no more bulky repayments each month), and presents an excellent opportunity for investment, tax deductions and wealth creation for retirement.
The basics of loan repayment never change. However there are a few tricks we can suggest to give you that extra edge and cut years off your mortgage.
A low interest rate and low ongoing fees can make an enormous difference over the life of a loan. The home loan market is changing all the time. Make sure that your rate is competitive in the current market.
Having the ability to make extra repayments and change your loan structure as your life changes will help you whittle the loan down as fast as you can. Every additional lump-sum payment you make to your loan has an enormous effect in the long-term.
The better your loan fits with your lifestyle, the easier it will be to pay it off. You might be doing everything you possibly can to pay your loan off faster, but if it’s not set up to suit your situation or encourage extra repayments, you will feel like you’re treading water. Talk to your broker to ensure that you’re set up to achieve your goals.
Interest is calculated every single day on your mortgage, so the earlier you can pay money into it, the less interest you will pay. This applies both on a monthly basis (i.e. make an extra payment towards the start of the month rather than the end), and over the entire term of the loan. The more you pay into the loan in its early stages, the greater the effect. Even a single extra repayment at the very start of the loan can cut years off its term.
Many home loan packages these days offer you a fee-free offset account and a fee-free credit card. To put it simply, an offset account is an ordinary transaction account that is linked to your home loan. Every dollar you deposit into an offset account “off-sets” the balance owing on your home loan. For example, if you had a $400,000 mortgage and $5,000 sitting in your offset account, you would only be charged interest on the difference between the two - $395,000. If you use your offset account as your transaction or savings account, the minute your salary is paid into the account it saves you interest. This can have an enormous effect on your loan in the longer term, purely because it puts your money to work immediately.
Used carefully, a fee-free credit card with an interest free period can also help you pay off your loan faster. Most people use their bank account to pay their bills and make purchases throughout the month. If instead you used an interest-free credit card for those purchases, that cash would sit in your offset account for longer. Then, at the end of the month before the interest-free period expires, you can withdraw the money to pay off the credit card, and you will have had hundreds (maybe thousands) of dollars saving you interest throughout the month. Please be careful using this strategy, so as to avoid the temptation to spend more when using a credit card.
Most lenders will allow you to not only make your loan repayments monthly, but also fortnightly or weekly. Since interest is calculated daily, more frequent payments will save you interest. Additionally, many lenders when calculating their weekly or fortnightly repayments will simply divide the monthly payment by four (for weekly) or two (for fortnightly). This essentially means that you make the equivalent of 13 monthly payments over the course of a year, instead of 12. This too can have a dramatic effect on how quickly you pay off your loan.
The home loan market changes continually. New products and features are entering the market all the time, and some offer significant savings to astute borrowers. There are many opportunities associated with technological improvements and use of the Internet. For example, by utilizing Internet banking, you can minimize transaction costs, set up automatic payments and manage your accounts as efficiently as possible. Make sure you stay in touch with your broker and let them know when your situation changes, so they can help you spot these opportunities.
It’s an old story, but budgets are incredibly powerful tools. The biggest strength in a budget lies in the fact that it makes you pay attention to the things that you are spending money on, and helps you identify where you have opportunities to save. Even if it’s very basic, a budget will help focus you on the important expenses, help you avoid nasty surprises, and generally leave you with a little extra at the end of the month. You can use this to help pay off your loan faster, and maybe even reward yourself for your hard work.
Are there expenses in your life that you can cut back on to free up extra cash to pay down your mortgage? Simply cutting down on the number of meals you eat out, the little afternoon snacks of coffee and muffins, the number of cigarettes you smoke, or other little luxuries can do tremendous things for your home loan. There are many strategies to help you do this, be it a gradual cut back (from five coffees a week to four, to three), a temporary period of abstinence where you commit to hardcore savings for a specified period of time, or even an alternating strategy where you have a normal week, and then an extra good week. The essential fact is the more money you can pay off your home loan sooner, the better it will be in the long run. Find a strategy that works for you.
It is unlikely that you will live in the same house for the full 30 years of the loan. Many lenders will allow you to keep your same loan account when you sell one home and buy another. Provided that your loan is working well for you, this can save exit fees and set up fees when you transfer from one loan to another.
Fixed rates can work excellently in managing the risk that interest rates will rise. At the same time, if you call it wrong and rates actually decrease, or if you find that you need to change the loan before the fixed period ends, they can cost you thousands. You therefore need to consider your choice very carefully. You might choose to split your loan so you have some fixed, some variable, thereby hedging your bets. You should also ensure that the term of your fixed rate matches with your plans for the future. If you’re likely to sell your home in 3 years, a 5-year fixed rate is not usually a good idea.