Paying your home loan off sooner
One of the problems with mortgages in Australia is that you are not given enough education about how they work or how best to manage your home loan so that you can be debt free faster. Here are 7 simple yet smart loan strategies for you to consider:
1. Don’t get caught on the honeymoon
Honeymoons from banks are not all they are meant to be. Introductory or honeymoon 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 honeymoon period is over, the lender will switch you to a higher variable rate of interest.
There are two problems with this scenario. First, the variable rate is often higher than some of the lower basic loans available so you could end up paying more. Second, you need to clearly understand that a honeymoon rate applies only for the first year or two of the loan and is a minor consideration compared to the actual variable rate that will determine your repayments over the next 20 or so years.
You may also be hit with fairly steep exit penalties if you want to refinance in the first two or three years to a cheaper loan. So make sure you fully understand what you are letting yourself in before setting off on a “honeymoon” with your lender.
2. Make repayments at a higher rate
The most obvious way to get ahead of your home loan commitments is to pay more as if you have a higher rate of interest. Get a loan at the lowest rate you can and add 2 or 3 points to your repayment amount. So if you have a loan at about 7 percent and pay it off at 10 percent, you won’t even notice if rates go up. Best of all, you’ll be paying off your loan quicker and saving yourself a packet.
3. Pay it off quickly
Time is money. There are all sorts of strategies for paying less interest on your loan, but most of them boil down to one thing: Pay your loan off as fast as you can. For example, if take out a loan of $300,000 at 7.07 percent for 25 years, your repayment will be about $2,134. This equates to a total repayment of $640,126 over the term of your loan. If you pay the loan out over 10 years rather than 25, your monthly payment will be $3,494 a month (a decent compromise). But the total amount you will repay over the term of the loan will be only $419,290 – saving you a massive $220,836!
Use the investment calculator to find out how fast you become debt free!
4. 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. How much of a difference can this make for you?
This is how it works (based on a monthly loan):
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. Using our example from above, by paying monthly, you will need to repay $640,126 over the term of your loan. By paying fortnightly, you will save $48,534 in interest and 4.5 years off the loan. The end result providing a big boost to your hip pocket.
5. Hit the principal early
Over the first few years of your mortgage, it may seem that you are only paying interest and the principal isn’t reducing at all. Unfortunately, you’re probably right, as this is one of the unfortunate effects of compound interest. So you need to try everything you can to get some of the principal repaid early and you’ll notice the difference. Every dollar you put in your mortgage above your repayment amount attacks the capital, which means down the track you’ll be paying interest on a smaller amount. Extra lumps sums on regular additional repayments will help you cut many years off the term of your loan.
6. Have you asked for a packag loan deal?
Speak to your lender about the financial packages they have on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser or even a fee-free transaction account. While these things may seem small beer compared to what you are paying on your home loan, every little bit counts and so you can use the little savings on other financial services to turn them into big savings on your home loan. There are also “professional” packages on offer for amounts over a certain limit, which can be as little as $150,000. There are all sorts of discounts and reductions attached to these packages so make sure you ask your lender about them.
You can check out the latest interest rates here.
7. Consolidate your loans and save
One of the best ways of ensuring you continue to pay off your home loan quickly is to protect yourself against interest rate rises. If your home loan rate starts to rise, you can be absolutely positive about one thing – your personal loan rate will rise and so will your credit card rate and any lease or hire purchase loan you happen to have.
This is not a good thing as the interest rates on your credit cards and personal loans can be as high as 15 to 22% per annum, much higher than the interest rate on your home loan. Many lenders will allow you to consolidate and refinance all of your debt under the umbrella of your home loan. This means that instead of paying those high percentages on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at home loan rates currently below 7% p.a. Thats over a 50% percent saving in interest costs.
As always, any extra repayments or lump sums will benefit you in the long run.
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