By putting some proactive strategies in place to get your home loan paid down sooner, you could really save yourself some money. Here are some simple strategies to put in place – from right now!
On the go? Here’s 30 seconds of key take outs:
- The longer you’re paying your mortgage, the more money you pay out in interest. The bank benefits from this, but you don’t!
- There are some really simple and quick wins to help you reduce the amount of interest you’ll end up paying, such as just switching from monthly to fortnightly repayments, and paying more than the minimum repayments each fortnight.
- If you’re lucky enough to come into a windfall – such as an inheritance or a gift of cash from some generous relatives or friends – the best way to make this windfall work best for you is to knock down a chunk of your debt. Less debt always means better cash flow.
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If you’re keen to make some serious headway on reducing your mortgage debt, here are a few tips that could help you get ahead already.
1 Pay fortnightly instead of monthly
One of the easiest ways to pay down your mortgage faster is to set up your home loan repayments fortnightly instead of monthly. If you get paid fortnightly, you’ll find this is an easy and convenient way to make your repayments – and there’s no need to pay more money to make a big difference.
Just by splitting your mortgage payment in two [and then some – keep reading!] and paying more often, you could cut years off your loan term and save a lot of money in interest.
How does this work? There are 26 fortnights in a year, but only 12 months. By paying fortnightly, you will be effectively making the same as 13 monthly repayments every year – paying more without making an impact on your budget. Over a 30 year loan, this could shave up to 4 years off your loan term and also save you some interest over the life of the loan.
Now …what to do with that extra cash?
2 Increase your fortnightly repayment commitment
In the first few years of your loan, most of your repayments will go toward paying the interest rather than paying down the loan itself. As frustrating as this can feel, it is just a quirk of the way compound interest works. However, by making bigger repayments [above the minimum repayment amount set by the lender – there is a reason they set a minimum …think about who benefits from this], you’ll be paying more off the loan itself, reducing the amount of interest you have to pay. Over time, this can help to significantly shorten your loan term and save you even more money.
It might be a good idea to make your loan repayments at two or three percentage points above your interest rate. This will not only help you pay off your loan sooner, if you’re already paying at the higher level, you won’t be in for a shock if interest rates should rise in the future.
If your budget won’t allow you to repay at a higher interest rate, consider what you can actually afford to add to your repayments. Even if you can only afford an extra $100 a month, then go ahead with that for now. Every little bit helps and you can always increase your repayments when your circumstances improve.
3 Base your loan repayments on interest rates 2 to 3 percent higher
Our interest rates are still at all-time lows and lenders are offering some very competitive rates and home loan packages. If you’ve had your home loan for a while, talk to us at Capital Properties [call 02 9222 9444] about the possibility of re-financing to get a lower rate. If your circumstances have improved since you first took out your home loan, this could also help you get a better rate.
Many experts are predicting that interest rates will continue to stay low for the foreseeable future. If this is the case, it’s a good idea to continue paying at the higher rate regardless. Again, this is a strategy for attacking the principal of your mortgage, which saves you money on interest and can significantly reduce your loan term.
4 Use extra cash lump sums to reduce your mortgage
We all get little windfalls from time to time even if it’s just a bit of birthday cash, but instead of squandering extra cash on stuff you don’t need, consider the advantages of reducing your home loan! Not all loan products will allow you to make extra payments, so talk to us to find out if that’s an option on your particular loan.
Any extra payments you make on your mortgage reduces the loan principal and that means you’ll pay interest on a smaller amount. So if you get a tax return, a gift of cash, or sell that second car; and your budget is tracking okay whack most or all of the money down on your mortgage to give yourself the best gift of all.
If you’re approaching a milestone birthday or Christmas – consider asking family and friends to give cash rather than gifts. Tell them what you plan to do with the extra cash – they’ll love the idea that they can contribute to helping you get off to a good start, and perhaps even donate more than they would have otherwise.
Remember, reducing the amount you owe to the bank, reduces the interest you end up paying so ends up as cash in your pocket anyway!
5 Consider the benefits of a mortgage offset account
Many variable rate home loans can be organised with a mortgage offset account as part of the loan product benefits the lender offers. Using an account like this could help you put any extra cash to work on reducing your home loan – even if you don’t want to use it to pay off the home loan itself.
A mortgage offset account is simply a savings or transaction account that is linked to your home loan. The more money you have in your offset account, the less interest you have to pay on your home loan [aka more-cash-in-your-pocket]. For example, if you have a $300,000 home loan and keep $10,000 in your offset account, you only pay interest on $290,000.
This is often considered a good way to put the interest from your savings to work for you. If you kept your savings in a regular savings account, you would have to pay tax on the interest it earned. By putting that money into a mortgage offset account instead, you can save on tax and pay down your home loan sooner.
Don’t have a spare lump sum of money right now? You could be saving yourself money on interest simply by having your salary paid straight into your mortgage offset account. Because you can use it like a regular transaction account, it won’t affect your budget. By doing this, you save a small amount of interest every month. Over months and years, these savings contribute positively to your cash flow, your borrowing power to build your investment portfolio, and your lifestyle.
Remember, your home loan is one of the biggest financial commitments you’ll ever make. It is important that you continue to manage your mortgage over the life of your loan. A set and forget approach for the next 30 years is no way to get ahead!
Talk to us regularly to ensure your loan product remains the very best one for your needs and personal circumstances.
If you’d like to talk about your repayment strategies, or if you think it’s time for a home loan health check then please don’t hesitate to give us a call. We’re here to help you make the most of your finances and reach your financial goals sooner.
And if you find yourself a little stuck about how to best fund your next investment, or what to do about your existing one, our property investment mentors are always eager to help.
Call us on 02 9222 9444.
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