In the last 10 years, the average Australian home loan amount has nearly doubled. House prices continue to soar and affordability is quickly diminishing. Whether you’re a Gen Y living in Melbourne, Sydney or even New York where it’s much the same, paying down the mortgage has never been more important.
If you’re new to the game or have been plugging away at the mortgage for a few years, they’re two key things you need to understand about your home loan. Firstly, the interest payable isn’t tax deductible and so paying it down quickly should be your first priority. That is unless you have credit card debt or a personal loan with a higher interest rate. If that’s you, deal with that first.
Secondly, you’ll be paying the most interest in the first few years of your loan as the principal amount is at it’s highest. So in the words of our CEO, “The sooner you can get onto reducing that principal the better off you’ll be because your interest will start reducing right away.”
So short of finding a secondary income stream (which WE can help you with too btw) here are some of the best ways to get that loan amount down pronto.
Refinance to a lower rate
This may seem obvious but many people delay this simple yet effective money saving move for a number of reasons. Some may be put off by the complexity of switching lenders, especially when they have all their financial products with a specific bank. For others, it may be finding the time to get around to it.
But unless switching means paying another round of Lenders Mortgage Insurance or pricey exit fees, refinancing to a lower rate can save thousands in the long run. Either way, comparing your options is a worthy exercise.
Keep in mind, your situation may have changed since applying for your initial loan. Chances are you’ve probably paid some of it down and your property may have increased in value. This means you may now qualify for a whole range of different loan options compared to when you first started. It helps to have a look where you stand.
Steer clear of the honeymoon period
Introductory or honeymoon rates are simply a marketing tool for lenders. As the financial expert and blogger Nila Sweeney explains, they start you off with an attractively low rate for the first year or two to get you in the door. But after that period, the interest rate usually jumps to a higher variable one which means you generally end up paying more. To make matters worse, unless you want to pay a high exit fee you’re stuck with that loan for the long haul.
A variable home loan without a low introductory period, that offers flexibility in refinancing is a much better option and one that will see you paying less interest over the life of the loan.
Make fortnightly payments
Most home loan repayments are calculated on a monthly basis. But fortnightly repayments can serve you in two ways. Firstly Sweeney explains, they allow you to squeeze in the equivalent of one extra monthly payment per year. For example, assuming your monthly repayments are $2,000, in a year that means you would have paid off $24,000 ($2,000 x 12). If you’re paying fortnightly, you divide your monthly amount in half which makes it $1,000. As there are 26 fortnights in a year your total repayments become $26,000 ($1,000 x 26).
This extra amount you’ve paid comes directly off your loan principal, which in turn reduces the amount of future interest calculated, meaning you pay off your loan sooner.
Turn your mortgage into your key financial product
Many lenders offer 100% offset loans where your mortgage and your transaction account are linked, meaning everything comes in and out of the one account. Your mortgage repayments, your income, and all your living expenses operate from that account. The benefit here is, any money sitting in that account, be it your income or any savings you have, is offset or deducted from your home loan amount. The interest is then calculated on the reduced amount rather than your total loan amount.
For example, if your mortgage amount is $500,000 but you have your monthly income of let’s say $6,500 plus your $8,000 of savings sitting in your offset account, the interest payable is now calculated on $485,500 rather than the $500,000. Ideally the option to have multiple offset accounts is a good one as it allows you to keep your savings accounts separate from your cash hub.
Now you might say the savings here are small, under $100 per month. But that’s still over a $1,000 per year and when you look at the average life of a loan, that becomes over $25,000 in interest saved. Not so little anymore.
Reduce your weekly expenses
This one you probably don’t want to hear but if paying down your mortgage sooner is really important to you than you’ll find areas to reduce your spending without feeling like you’re missing out. It’s about cutting down not cutting out and every little bit helps. Have a look through your spending and see where you make changes. Once you’ve done this, setting a budget and sticking to it is key. And if you can find other non-consistent ways to pay that little bit extra even better. Think work bonuses, tax returns etc.
If you need some ideas of where to start cutting your expenses have a look here Live Well on Less.
Make sure you choose a loan that allows extra payments. Otherwise, put it in your offset account as it will work in the same way while giving you the option of pulling it back out without officially having to redraw from your loan.
Combining these tactics can be the difference in your home loan running for the average loan duration of 25 years (ouch) to paying it off in 10 or even 5 if you’re really committed. The best way to really sit down and look at your potential to do this is through WE. We’ll not only show you how much you can save and where but we’ll help you restructure your spending so it lines up with what you really want to achieve. In other words, we’ll help you become your best financial self. Reducing your home loan is just the beginning.
Ready to become your very best? Get started with a FREE 1 hour Financial Kickstart session today.
Article by Evie Tramer
Disclaimer: all information contained within this article is of a general nature and should not be relied upon when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.