Top 10 tips to paying off your mortgage real fastTom Uhlich
Here are top 10 ways to pay off your home loan real quick
Your home loan is probably the biggest investment you will make in your life and a debt that most people would like to pay off as quickly as possible.
1. Don’t go near introductory offers
Introductory rates have long been an important marketing tool for lenders. You are initially offered a cheap rate on your loan to get you in the door but once the intro period is over, the lender will switch you to a higher variable rate of interest.
2. Make more frequent payments
The simple things in life are often the best. One of the simplest and best strategies for reducing the term and cost of your loan (and thus your exposure should interest rates rise) is to make your repayment on a fortnightly rather than monthly basis. It works like this:
Split your monthly payment in two and pay every fortnight. You’ll hardly feel the difference in terms of your disposable income, but it could make thousands of dollars and years difference over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference.
3. Consolidate your debts
Interest rates on your credit cards and personal loans are much higher than the interest rate on your home loan. Many lenders will allow you to consolidate – re-finance – all of your debt under the umbrella of your home loan. This means that instead of paying 15 to 20% on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at 5.00% (or whatever rate your home loan is).
As always, any extra repayments or lump sums will benefit you in the long run.
4. Split your loan
Many borrowers worry about interest rates and whether they will go up but don’t want to be tied down by a fixed loan. A good compromise is a split loan, which allows you to take part of your loan as fixed and part as variable. Essentially this allows you to hedge your bets as to whether interest rates are going to rise and by how much.
If interest rates rise you will have the security of knowing part of your loan is safely fixed and won’t move. However, if interest rates don’t go up (or if they rise only slightly or slowly) then you can use the flexibility of the variable portion of your loan and pay that part off more quickly
5. Use your equity
If you have already paid off some of your home, you are said to have equity. Equity is the difference between the current value of your property and the amount you owe the lender. For example, if you have a property worth $750,000 on which you owe $250,000, you are said to have home equity of $500,000, which you can re-borrow without having to go through the approval process by accessing it through your existing loan.
Many lenders will allow you to borrow using your equity as collateral. Most lenders will allow you to borrow up to about 80 per cent of the loan-to-value ratio (LVR) of your available equity. If you are careful, you can use this equity to your advantage and help to pay off your home loan sooner.
Using an equity loan to improve your property could be a good way to ensure that your home increases in value over time. But larger expenses such as cars and holidays that would have been paid by credit card are more affordable on the lower rate of your home loan.
6. Switch to a lender with a lower rate
It may sound like a simple idea but switching out of your current loan and taking out a loan at a lower rate can mean the difference of years and thousands of dollars. If you have a loan that is tricked up with all the features, or even if you have a standard variable loan, you might find that you could get a no frills rate that is as much as a percentage point cheaper than your current loan.
However, check out what it will cost you to switch loans. For example, there may be exit fees payable on your old loan and establishment fees and stamp duty on your new loan. Work it all out and if it makes sense, go for it.
7. Forgo those minor luxuries
I will be hated now. Once you have a mortgage, your life is likely to be luxury-free (or at least pretty close to it). Think of all the weight you will lose by giving up your favourite donut. For the sake of your health you should ease up on the donuts and drink less anyway. Take your lunch from home and save on bad fast food. Trust me, your body will thank you for it.
If you’re still not convinced consider the following example. A typical day may include a couple of coffees and donut ($14), lunch ($15) and a couple of beers after work ($12). That’s $41 a day or $287 a week or $1,243 a month or $14,924 a year.
**Put that extra onto a mortgage of $750,000 and you could save 11 years off your mortgage and $200k+ interest….food for thought right there.
8. Get a cheap rate and invest the difference
When interest rates are low, like now, it is usually safe to say that inflation is also low. Thus, bricks and mortar may not be the best place to invest. Try getting the cheapest home loan you can find and make the minimum repayment. This allows you to use the extra cash to invest in other, more profitable areas.
You may find that the return you get on shares or some other type of investment means that you have created a nice little nest egg which you can use to pay off a bigger chunk of your home loan than you might otherwise have been able to do.
But beware – high returns often mean high risks. Before undertaking any investment, invest in a consultation with a qualified financial adviser.
9. Get an offset account
I have been preaching this for 15 years….
Get an offset account and have your wage paid into it, then use an interest free credit card for all your expenses. At the end of the month, payout the card with the money in the offset. The power of this is your entire wage is sitting in the offset account and reducing the amount of interest the bank charges on your loan.
ie Home Loan $400,000, Offset $10,000…interest is charged on a balance of $390,000 NOT $400,000. It can make a big difference.
10 You don’t have to always use the big 4 banks!!!
Smaller lenders like ING and Auswide don’t have the overheads attached to branch networks so can offer lower rates.
Some borrowers worry about what might happen if their lender gets into financial trouble. Keep in mind that you’ve got their money – so don’t worry too much. There are some smaller lenders whose names might not be readily familiar but whose rates might be enough reason to get in touch.
If you want a review of your home loan, just email the following information to email@example.com or sms to 0476111000 and the Boss will conduct a review and let you know how uch you could be saving.