WOULD YOU LIKE TO SHAVE 10 YEARS OFF YOUR MORTGAGE? HOW MUCH INTEREST COULD THIS SAVE YOU?Tom Uhlich
It’s not rocket science, it’s simply a matter of making more repayments more often and making sure you’ve got the best mortgage for your situation.
Of the millions of homeowners, only some are getting out from under mortgage payments years, sometimes decades, before their neighbours. How?
They make an effort to pay off their mortgage early.
The average home loan is now over $400,000 NSW), but living mortgage-free is not a pipe dream.
You may only need to find an extra $200-$500 every month so that you can exceed your mortgage payments. While many think they can’t afford that, you’d be amazed at how much money you can save on a monthly basis.
KNOW YOUR BUDGET
Suncorp Bank executive manager of personal lending Tony Meredith says many people don’t know exactly where their money goes.
“Get to know your incomings and outgoings, and identify where savings can be made. You may be astounded to learn just how much you’re spending on eating out, takeaway or coffees each month,” he says. “By paying even an extra $20 per fortnight off your mortgage, you can make a significant difference to the balance.
“Spend your tax returns wisely. For example, depositing a $2000 tax return as a lump sum into an average $300,000 mortgage can potentially shave about eight months off a 30-year-term, saving a mortgage holder almost $12,000. Do this each year and watch the years drop off your loan.”
WORK IT OUT
There are plenty of free online mortgage payment calculators which will show you exactly how much money you can save by ramping up your repayments.
The monthly repayments on a $300,000 mortgage over a 25-year term at 7.25 per cent are about $2168. But a person could pay the loan off 10 years earlier and save $158,277 in interest by increasing their monthly repayments by $575.
Finding the extra money might not be easy, but it’s surprising how much people can reduce their incidental spending if they scrutinise their household budget. Ask yourself if you really need it, or do you just want it?
PAY FORTNIGHTLY INSTEAD OF MONTHLY
AMP financial planner Dianne Charman says on a $300,000 mortgage, a person can cut four years and six months off the life of the loan and save $82,823 in interest simply by swapping to fortnightly repayments.
“The loan is reduced faster as there are 26 fortnightly repayments each year, instead of 12 monthly repayments. If the person was to also boost repayments by $180 a fortnight, it would shave 10 years off the mortgage,” she says.
LUMP SUM REPAYMENTS
People can also attack their loan faster by making lump sum repayments whenever they can.
Charman says tax returns, work bonuses or inheritance money can all be pumped straight into the mortgage to help reduce interest.
“On a $300,000 mortgage, one lump sum payment of $5000, made five years into the loan, would save $15,681 in interest and reduce the term by 10 months,” she says.
“While it’s tempting to spend cash windfalls, people should try to stay focused on the main prize, that is to be debt free sooner.”
Brontie Chambers, manager of products and member value at Community CPS Australia, says even $5 extra each week can save you thousands of dollars in interest over the life of the loan and reduce your home loan term.
“However, make sure your loan allows you to make additional repayments without penalty,” she says. “Fixed-rate and basic (or ‘no-frills’ loans) often have restrictions on extra repayments or charge a fee for the privilege.”
KEEP YOUR SAVINGS IN AN OFFSET ACCOUNT
Since the global financial crisis, Australians have started saving again. While many people choose to park cash in high-interest online accounts or term deposits, it may be better to save in a 100 per cent mortgage offset account.
Any money in the offset account will be working to reduce interest and pay the loan off faster.
Another advantage of mortgage offset accounts is the cash can be easily accessed if necessary.
CONSOLIDATE YOUR DEBTS
You could can end up paying less interest because home loan interest rates are often much lower than personal loan, credit card and store account rates.
Chambers says that by reducing your monthly repayments into just one home loan repayment, you could reduce your monthly commitments so that you have extra cash available to make additional repayments off your home loan.
“However, this option requires discipline around future use of credit cards and store accounts, such as reducing limits or closing the account,” she says.
Home loan exit fees have been abolished on all mortgages taken out from July 1, 2011, making it easier for consumers to shop around for a better deal.
However, people with loans taken out before this date need to carefully consider the costs associated with moving a mortgage.
There can be numerous exit and set-up charges which include early termination fees, application fees, discharge and registration fees, mortgage insurance and valuation fees.
Before making the switch, it’s important to check whether all these costs will outweigh the potential savings from having a lower interest rate, and how long it will take to break even.
Edwards Marshall Financial Solutions manager Grant Edwards says one of the biggest mortgage-busting tips is to make sure that your interest rate and bank fees are competitive.
Reduce or stop using your credit cards it’s too easy to spend other people’s money. Any reduction in discretionary spending will reduce credit card repayments and the money saved can then be allocated to increased mortgage repayments.
“Don’t spend your tax refund, pay it off your mortgage. Make sure your gas, electricity, phone and internet providers are the best deals you can get,” Edwards says.
“Allocate whatever you can save on these costs to increasing your mortgage repayment. If you’re offered overtime or a second/part-time job, consider taking it and allocate the increased income to reduce your mortgage.
“Even if it might not seem like much, every extra dollar you pay off your mortgage goes off the principal, which is the real driver to mortgage reduction. For example, a 10 per cent increase in mortgage repayments will reduce the term of the mortgage by 20 per cent.”
LOW MORTGAGE RATE AND INTEREST RATE
Make sure you have the best interest rate you can find. Get your consultant to check if your loan is suitable for you. If you are higher, refinance now. Keep track of every penny that you spend for a month or two and you’ll be amazed at how much of it is frivolous.
It is a good idea to factor in further rises in interest rates and, if possible, start making contributions at the higher rate. It will ease the stress when repayments do increase and will also put you ahead of the scheduled loan term.
Alternatively, if rates decrease you should keep your repayments at the higher amount to enable you to pay off your loan sooner.