Anyone who has ever had to pay off a mortgage will tell you they would love to pay it off before the term, but most people will continue to chip away at their loan on autopilot. A proactive strategy can cut your loan term from 30 years to less than half in some cases.
Robert Projeski of Australian Mortgage Options offers 10 ways on how to own your home sooner…
- Pay your mortgage as you receive your income – for example, fortnightly. This cuts down on interest payable and can save you a lot of money over the course of your home loan. As there are 26 weeks in a year, but only 12 months, you effectively end up paying one month extra annually, reducing both time and interest on your home loan.
- Set up an automated recurring payment for your mortgage payments. This is usually free of charge and means that you are always on time and can’t overspend on other things, leaving you short to meet your payment obligations.
- Park a large lump sum into your mortgage account. For example, if you get $2000 back from your tax return, receive dividends from other investments, sold a car, boat or caravan or get bonus payments from your job, make a large payment towards your mortgage. These large lump sums can cut years worth of interest off the loan. You’ll need a re-draw or line of credit facility in order to have access to these funds when you need to.
- List your regular expenses and you’ll find one or two items that you can do without. Whether it’s buying your magazines as subscriptions rather than at the newsagent or pooling your family’s mobile phones and home phone on one plan, often giving you free calls in between all your numbers – these can present a considerable saving. This will make a big difference to your cash flow, freeing up disposable income to put into your mortgage account.
- Make a habit of going only your bank’s ATMs. The charges (usually $1 to $2.50 per transaction or account enquiry) can easily add up to a nice little amount ($60 to $120 per month) that can remain in your pocket or go towards your loan. Another way to save on transactions is to get cash out on EFTPOS purchases rather than using ATMs.
- Increase your repayments. You can cut up to two years off the lifespan of your loan by paying an extra $30 to $50 on each payment. This may just mean cutting out an extra cup of coffee here or there or occasionally taking lunch to work rather than buying it.
- Have your wages paid directly into your home loan account, but you’ll need a loan with re-draw or line of credit type facility so you can have unlimited access to the funds for living expenses etc. This will greatly reduce the interest that you pay as the interest is debited at the end of the month and usually calculated daily.
- Offset your loans with a savings account. This is called mortgage offsetting, whereas the amount in your savings account (earning interest) is calculated/subtracted against the actual interest charge against the loan amount, then the interest is calculated only on the balance. For an example, if your loan is $400,000 and you have $100,000 in savings, this equates to $300,000 on which you actually pay interest. This of course greatly reduces the amount of interest you effectively pay and will save you years on your home loan.
- Perform a mortgage health check. Sometimes you just have to admit your loan might not be the best for you anymore. It may have been superseded as a product or interest rates may have changed drastically, leaving you better off with a variable rate than a fixed one. In that case, look at refinancing.
- When refinancing, consider pooling or consolidating any other loans (such as a car or personal loan) and credit cards (with a much higher interest rate) into the one loan as the savings often will outweigh the slightly higher loan amount. And if your repayments end up being lower than they were, consider keeping the same amount going. The extra on each payment can really slice some cost/time off your loan.
Extra tip: If you’re refinancing, consider making a lump payment at the start. Most loans are set out that you pay more interest in the earlier stages. So if you pay only $100 at the start, this can add up to about $1,600 in interest savings over the life of the loan. Ideally throw a lump sum against your loan, which instantly reduces the premium and hence the interest payable.
Source : Australian Property Investor (3 February 2012)