I often joke with clients that I provide them with something they don’t really want – a mortgage. Lets face it – a mortgage in its own right isn’t too exciting but it enables your dreams to be realised. Those dreams might include a new home purchase, a renovation, buying a business, a new car – and the list goes on.
Fortunately, there are a few simple steps that you can implement to reduce your mortgage:
1. Pay Fortnightly
Yep, it’s that simple. Paying fortnightly saves about five years on your mortgage and it’s only because of the magic of compounding interest (but working in reverse). Paying fortnightly means you make the equivalent of 13 monthly repayments per annum – and that can make a BIG difference.
Make small but regular extra repayments – similar to fortnightly repayments. Combine the two and you really start turbo-charging your loan.
2. Bank Pre-Approval Limits
The amount a bank will lend a customer is staggeringly large, relative to people’s income. Just because you are pre approved and can afford today’s repayments, it’s important to think about what might happen if things change – higher rates, single income family, change in careers, unemployment etc. Even though a lender will sensitise repayments at 7-8% for ‘what if rates go up’, they use such measures as the Henderson Poverty Index to determine minimum living expenses for default family sizes – the key word here is ‘poverty’ – so if you like doing other things, like going out occasionally, keep well within bank servicing requirements. We can provide you with clear guidance on this important assessment to ensure taking on that mortgage doesn’t mean sacrificing other important areas of your lifestyle.
3. Got a raise recently?
Spend half and put the extra into your home loan – before you know it, if you don’t do this, the money you will make on the raise will be swallowed up in new lifestyle expenses in the blink of an eye!
4. Put your tax refund to good use
By putting a lump sum, like a tax refund, into your mortgage might sound boring but it can save you thousands! For example, on a new 30-year home loan of $500k, a $4,000 lump sum paid one year into the loan (with no other debt reduction strategy applied) could save you $10,580 and 5 months off the loan term.
5. Give your current bank the flick – Refinance
Refinancing your home loan, if there is a significant margin in interest rate to do so, could be a good idea. We usually give your current lender first right of refusal before we actually load a full application – if the difference is small in rate, then a full refinance may not be all that economical to do (find a competing bank branch who will tell you this small truth!!). If refinancing, it’s important to keep the repayments at the same amount to secure the same remaining term on the loan – it you refinance and take a new 30-year term on minimum repayments (which is what most people do without proper advice) then you will just reset your amortisation curve and any interest saving will be blown out of the water. (Ask us for a quote to demonstrate this – the findings will frighten you!)
6. Consolidate Debts
A bit like a refinance, except you may consider rolling your current loan, store cards and credit card into your home loan – but, again, tread with caution. I’ve seen many ads that advocate this and telling customers how they ‘saved’ hundreds in repayments but the reality is that if you consolidate and take a new 30-year term on minimum repayment the short-term personal debt (car loan, personal loan, etc) will be replaced with a long-term debt product (the mortgage) and the true cost will be eye-watering over the life of the loan- long after the current assets like the car, boat or TV bought on interest-free terms are gone.
7. Use an offset account
An old technique now but effective if you are not bad at budgeting. The premise with this is that you use the interest-free terms on the credit card and spend your monthly budgeted expenses using the card, while your salary and savings continue to sit in the offset account. At the end of the month, the credit card is automatically swept (paid) and you will have benefited from reducing your interest bill slightly for the month. This does have a compounding effect and can be very effective but it does require some budgeting skills and you also need to be careful that you don’t spend more than you earn by using the credit card. If the card is not paid in full by the due date, most credit card companies will slog you the full month’s interest on the amount you spent – so be careful!
Ok don’t yawn but a budget really can make a huge difference in where you spend your money. A great app that can help make budgeting easy and the above offset tip work more effectively is as Australian app called Pocket Book. It automatically takes a feed of your expenditure and summarises it all into a simple automated budget planning tool – it’s super nifty!
Some family homes are just simply too big now that kids have grown up or moved out. We can help determine an approximated end debt position with a relocation worksheet that could simulate what sort of mortgage you might have (if any), if you choose to do this after all considered costs.
10. Carve it up
Do you really need such a big back yard? Speak to a builder or a town planner to see if you could carve off the back yard and build a townhouse or a granny flat in the back. Subject to council planning and building requirements, this can make a huge dent in your home loan if you decide to build and sell a unit in the back yard or hold and keep as investment for the medium to long-term.
So there you go – 10 simple yet effective ideas to help you get ahead on your mortgage.