For many, purchasing a home will probably be the largest financial decision they make in their lifetime and a debt most will want to pay off as quickly as possible. There are some great ways to get ahead of the debt and pay off your mortgage much faster, we look at some things to consider.
1. Say no to introductory offers
Beware of lenders offering you the world (in the interim). Introductory rates, or “honeymoon” rates have long been a marketing ploy by lenders. These loans typically draw home buyers in with cheap introductory rate offers which then switch to an increased rate once the initial period is over.
If you do opt for an offer with a low initial rate, ensure you clearly understand what you are committing to. While it may seem very appealing at the time, remember that the honeymoon rate applies only for the first year or two, which is quite insignificant when you consider the actual variable rate that will determine your repayments over the next 25-30 years- so think long term!
- Make higher payments
There are a bunch of strategies for paying less interest on your loan, but most of them come down to one simple theory- pay your loan off as fast as you can. If you can afford it, we suggest paying extra into the account each month.
Let’s look at a quick scenario: If you borrow $500,000 over 30 years at a 5% interest rate, your minimum monthly repayments will be $2,684.
At the end of that 30 year period, you would have paid $966,280- Yikes! We know… the final figure is quite alarming. Hence, why paying off your loan sooner is so important.
If you were to pay an extra $100 a week ($400 a month) you would end up saving yourself $131,474 and shaving almost 8 years off the life of your loan.
So essentially, the more you pay, the more you save- it’s a simple theory but one many forget. It’s easy to think in the short term and forget about 30 years down the track, but if you are smart about your loan repayments you will certainly be grateful for it. Think of what you could do with an extra $130,000 in your pocket!
* You can calculate your loan repayments using our Peard Finance mortgage calculator.
- Make more frequent payments
One of the best (and easiest) strategies for reducing the term and cost of your loan is to make your repayment on a fortnightly basis, rather than monthly.
How it works: Split your monthly payment in two and pay every fortnight. It could make a huge impact over the term of your loan and should be relatively easy to do. How will it save you? There are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 month payments every year, rather than 12. Over 30 years, that is an extra 30 payments.
- Debt consolidation
Most home owners fear interest rate rises and how they will affect them. What they often overlook however, is that that as home loan rates begin to rise, it’s safe to assume that the same will happen with personal loans and credit card rates.
There are many lenders that will allow you to consolidate all of your debt under one roof- your home loan. So instead of paying 20 per cent on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at your home loans interest rate , Just make sure you increase you repayment on your mortgage so you are not paying that car loan over a 30 year period.
- Split your loan
Fixing your loan can be a daunting decision- interest rates fluctuate and with serious rate drops seen this year, it’s no wonder being “locked in” can be off putting to many. A good compromise is to split your loan, which allows you to take part of your loan as fixed and part as variable. This allows you to make extra repayments on your variable rate loan but also protects you from rate rises on your fixed rate
- Make your mortgage your key account
100 percent offset loans allow you to use your mortgage as your key account. This means you have one account into which you can pay all of your income and draw from for your living expenses via eftpos, credit card or a chequebook while also making your mortgage repayments from it.
These sorts of accounts can help speed up the amount of time it takes you to pay off your loan. As your pay goes into the account each time, you are essentially reducing the principal on which interest is charged.
- Make the switch
Refinancing involves paying out your current loan with a new one with the goal of obtaining a smaller interest rate. This strategy could see you shorten the term of your loan and reduce repayments.
Just make sure you check out what it will cost you to switch loans. Some loans come with exit fees that may not make it worth your while.
- Say goodbye to unnecessary luxuries
Seems pretty obvious right? Buy less, save more… simple! We know it’s easier said than done, but making a few cuts here and there will make a world of difference.
For example, do you buy your coffee every day? An average coffee in Perth costs $4.00. Let’s say you stopped buying coffee Monday-Friday for 12 months- that’s a saving of over $1,000 in the year! Make a few more of these little changes and you could see yourself saving into the thousands…
Of course, we aren’t saying “stop living”. By all means spoil yourself here and there but making small changes to unnecessary spending patterns will make a huge financial difference.
- Don’t forget about your mortgage
“As long I make my regular mortgage repayments, there’s not really much else to do”, right? Not really…
It’s really important that you keep up to date with what’s happening in the marketplace. Rates change, new products come about often, and if you are not prepared, you won’t be able to seize the opportunity to stay ahead of the game. So make sure you don’t forget about your home loan.