Your mortgage (home loan) is most likely the largest burden to your budget. It is a debt that, if you are like most people, you would like to have paid off as quickly as possible. The less time you take to pay your mortgage off, the more money you save (less interest to pay). The quicker you are on your road to financial freedom. It may seem like an uphill battle that you can't win at first, but if you follow some simple tips, you may be able to actually pay your mortgage off much faster than you expected.
The first and biggest mistake many people make is purchasing a home that stretches their budget past being comfortable. A good ratio to aim is for is a maximum of 30% of your household income. Examine your household monthly budget and determine what it is that you actually want to spend on your housing expenses – It will most likely be much less than what the bank will tell you that you can afford to pay.
Many lenders use honeymoon or introductory rates as marketing tools. This will consist of a lower introductory rate that later switches to a much higher variable interest rate. It may seem attractive at first glance, but many of these loans then switch to a higher than the market rate of interest and also high large refinancing/break fees. This practice was one of the root causes for the housing finance crash of 2008/2009 that radically changed the banking system. The banks make more money from you the more you delay in paying off the principal amount that you have borrowed.
A golden rule of debt repayments is to clear the most expensive debts first. Meaning to make paying down high-interest debts (eg: personal loans and credit cards) your first priority. This will save you cash that can then be used to pay off your mortgage faster.
Another way is to look at all your debts, then find out how much is left to pay out each loan, as well as the interest rate of that loan. Focus on paying off the loan with the highest interest rate and the lowest amount to pay off. Pay off that loan and add that amount to the next most advantageous loan to pay off early.
Your lender will most likely allow you to include any fees and charges into the loan, so they are slowly paid off with your mortgage repayments. This just adds to your principal amount borrowed, the interest you will pay, and the time it takes to pay off your loan. If you can, pay these fees & charges upfront with cash.
Over the first few years, it may seem that you are only paying interest and the principal isn't reducing at all – you are probably right. With compound interest, the higher the principal amount, the less effect the minimum required repayments gave. The more you can pay off early in the term of your home loan, the more you will save in interest. If you come into a lump sum of money (eg: inheritance, work bonus, or tax refund) put as much as you can straight onto your mortgage. It will decrease the principal amount owing and therefore the amount of interest that you ultimately pay as interest payable is calculated on the loan's daily balance.
Each time you pay more than the minimum amount on your mortgage, less interest is accrued. The most effective way to pay off your home loan faster is to increase your repayments. At the time it may seem small and insignificant. But over the life of your mortgage, the savings will add up substantially.
Let’s look at a home loan example:
So it is quite important to add every dollar you can above your minimum repayment amount, as this means you will be paying interest on a smaller amount, therefore more of your repayment goes to paying down the principal, and thus compounding your savings!
By increasing the frequency of your payments, you are effectively saving interest. As by week 3 of each month you will have already paid ¾ of the monthly amount. As the loan's interest is calculated daily, this saving adds up over time and will save you substantially at the end of your mortgage.
Offset accounts are savings or transaction accounts that are linked to your mortgage. Whatever amount is in the savings account is used to temporarily to reduce (off-set) the loan's principal amount and therefore reduces the interest payable on your loan, as the loan's interest is calculated daily. However, another benefit is that Interest Saved is NOT taxable, but any interest you earn on your money held in a normal interest-paying bank account is taxable at your highest marginal tax rate.
Unfortunately, when interest rates fall, a lot of people use it as a chance to lower their payments. If you keep your repayments the same when rates fall, more of your repayment goes to pay off the principal amount, and you will pay off your loan faster.
You should keep a constant eye on your mortgage and your financial situation. Is your mortgage still suitable for you, are you on the best rate and package? Are there other lenders or mortgage products that would suit me better?
By doing the hard work, you can pay your loan off in the quickest time frame possible saving you many thousands of dollars and years of repayments.
NOTE: RedCap Finance Brokers are Credit Advisors, and this is not meant to be taken as financial advice or professional tax advice and is only of general nature only. You must seek appropriate professional advice before taking any actions. The above information comes with no warranties whatsoever. We take no responsibility for any actions you may or may not take.
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The material on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this website is General in Nature and does not take into account any person's particular investment objectives, financial situation and particular needs. Before making an investment decision based on this general information you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this website are provided for illustrative purposes only. Although every effort has been made to verify the accuracy of the information contained on this website, New Property and Finance Pty Ltd, its officers, representatives, employees, and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.