Many clients that I meet are looking for the holy grail of knowing how to pay their home loan off sooner, and although there is no quick solution to this, for the disciplined it is not outside the realms of possibility to pay your home off in under 7 years. It is all about taking a number of beneficial steps to use whatever surplus cash flow you have to reduce your home loan quicker, which in the long term can save you hundreds of thousands of dollars in Interest. Here are a few things you can do to ensure that you can do everything possible to reduce your debt sooner. It is amazing how the little things can really make a big difference.
- Extra Repayments: However you receive extra funds, whether it be through inheritance, a lottery win, a bonus from work, a tax return, the sale of other assets, if you can channel this money into your mortgage, it can save you thousands. Redirecting funds straight into your mortgage instead of into your day-to-day account (and just spending it) will allow you to repay your home loan much more rapidly.
- Pay rises: When you receive a pay rise, why not use this as an opportunity to increase your loan repayments, even if it is only by a percentage of your increase, otherwise you will just spend it anyway, and if you did this every time you received a payrise, it would have a massive effect over the life of your mortgage.
- Paying your repayments weekly or fortnightly: By paying your monthly commitment on your home loan fortnightly (50% of monthly) then you pay an additional months repayment every month, and can easily save 5 to 6 years of your total loan life and tens of thousands of the interest. (Beware: bank calculated fortnightly repayments do not allow you to repay quicker as they are less than 50% of the monthly amount, and are structured over the original 30 year term)
- Increasing your minimum repayments: A small increase in your minimum repayment will have a massive effect on your long term loan life and interest paid. Simple and effective, and you probably will not even miss it!
- Debt recycling for Investment purposes: Allows you to channel your equity from your property into investments, with tax deductible interest being the consequences. May allow you to reduce your home loan portion from the returns on your investments. (Consult a financial planner).
- Reduce term on loans when refinancing: Most loans are refinanced every three to five years, and consequently when this is completed, the repayment term is often increased back to 30 years. What this means is that if you refinance every 5 years on a thirty year term and do not pay additional repayments, you will never repay your loan in full, and may possibly owe almost the same when you retire as you do now.
- Be more aware of your loan and repayments: Speak with a mortgage broker about your loan and your individual circumstances to get some tailored recommendations about what to do to reduce your debt quicker. Use financial calculators from various websites to compare and contrast what the true benefits of using different payment strategies or offset facilities are. Also find out what the true cost of redrawing money from your home loan really is. There is an old saying that says “knowledge is power”. The more knowledge you have about your loan and the different things that affect it, and what you can do to change your situation, the more influence you will have on the direction your loan takes.
- Ensure your Mortgage has the lowest interest rate: If you can save 0.5% to 0.7% on your interest rate, and continue to make the same repayment you were making on your old loan, you will save years of f your mortgage. On an example of $350,000 reducing your interest rate by 0.5% and maintaining your old repayments would save in excess of 5 years, but more importantly, in excess of $178,183. Incredible benefits longer term, and no extra cost for you!
- Line of Credit: This is for the disciplined, and I can’t even make it work effectively! The idea is that all of your income is deposited into your loan account, and all your expenses are paid by credit card each month (interest free) and then you repay the credit card at the end of the month. Works great for those good budgeters amongst us, but the risk is that you will spend back up to the limit.
- Offset Account: A savings account that is linked to your mortgage with the credit balance used to offset any monies you owe on your loan. This is the same principal as paying in advance, however has some great benefits for investors. You only pay interest on the difference between the loan balance and the offset account, thereby reducing your interest charge on your loan each month.
- Consolidate your debts: by ensuring all of your debts are on the lowest possible rate (ie home loan rate), and you continue to repay the original loan repayments, you will rapidly repay your loans and save interest. The risk here is that you will put short term debt over a long loan term, say a car loan of $30,000 over a 30 year term, you will effectively still owe more than $26,000 when the car is worth $5,000, if you only pay the minimum repayment. Needs to be managed carefully.
- Split your loans: Allowing you to have loans for differing purposes, or fixed and variable rate loans separated.
- Reduce unnecessary expenditure: If you are dedicated to repaying your home loan much quicker, you can give up a lot of the luxuries in life to fund the additional repayments, but don’t make it a chore or you will learn to regret it. Keep in mind with this strategy, when you are ahead on your loan you can shout yourself a repayment holiday for a while, which may in fact enable to you to take a real holiday. Reward yourself for your dedication to your mortgage repayment.
- Budget, Budget, Budget: I can’t stress how important a budget is to ensure that you really know how much money you should be able to spend at the end of the week. Clarity around this is vital to ensure you are in control of your finances.
Your Mortgage is a very personal thing and your needs and requirements are very specific to you. There is no one size fits all solution these days and there are many options within the home loan market. It pays to speak with a mortgage professional that can provide guidance for you to help you realise your goals of repaying your loan sooner.