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HomeMoneyMy top tips to pay off your mortgage sooner

My top tips to pay off your mortgage sooner

Pay off your mortgage sooner

By Tina Howes, Mortgage & Finance Advisor – SmartMove

You have a new loan over 30 years and are doing the numbers and dreading the thought of still having a mortgage in 30 years’ time.

Here are my key tips to ensure this doesn’t happen to you and how you can repay your loan off sooner or create a buffer that you can draw upon if you ever need to.

Before I jump into these tips, though, what if I told you that if you have received a loan from a bank in recent years, then I guarantee you (assuming your circumstances haven’t changed) there is a surplus there for you to make extra repayments.

Yes, that’s right – at the time the bank assessed your loan and factored in all your outgoings, living expenses which you declared, they also added a buffer to the expected loan repayments on your new loan adding at least 2.50 per cent extra to the actual interest rate.

You have the choice to spend this buffer, or save it, make extra repayments to get out of debt and own your own home sooner.

  1. Increase your repayments by reducing the term.

Download an app that lets you calculate your mortgage repayments – there are quite a few apps out there and most are free. You can play around with the inputs and change the rate and the loan term. Try and calculate your loan repayment over a five or 10 year less loan term. If you have a 30-year loan term, change it to 25 years. This will increase the repayment amount slightly so you can get ahead and pay it off in less time. For example, $500,000 over 30 years at 2.50 per cent is $1,975 per month. If we reduce the term to 25 years, the repayment goes up to $2,243 per month. An increase of $268 per month, or $67 per week. This could be the difference of taking a packed lunch from home or having one less coffee and toast from a cafe a day.

  1. Increase your repayment by increasing the interest rate.

 Add one per cent or more to the rate. This will increase the repayment and you will get ahead on your repayments. It will also give you peace of mind to know that if (and when) rates go up you are already able to cope with the increase, and if you really needed to, could reuse some of the extra repayments until you have adjusted to the increase.

  1. If you have investment debt, chances are you are on interest only repayments. Put aside the principal on these loans also.

Keep the loan on interest-only but calculate the principal and interest repayments and make this extra repayment into an offset account. The catch here is to make this offset against your primary residence home loan. If you are lucky enough to be with a bank that allows multiple offset accounts, you can even keep this in a separate account. This balance, as it builds, makes good financial sense and good discipline so that your investment property balance is going down (net of offset) whilst the offset serves to reduce the interest payable on your home loan, while keeping the investment debt higher. This is important as the investment property interest is likely a tax deduction, whereas your home loan interest is not.

Your interest-only period is likely only five years at most, and then is subject to a reassessment at the end of the period and you may not qualify for another period. This savings gives you a buffer to use in the event you have to start making principal and interest repayments on the loan and at the time are not comfortable to do so.

      4. Use equity in your home to buy car instead of a car loan.

Looking to make a big cash outlay? Purchase a new car? Or buy a caravan? Or have around the world holiday? Thinking of taking out a personal loan to fund it?

Personal loans often have higher interest rates than home loan rates. If you have equity in your home, think about using this equity instead of a personal loan. Make sure you don’t get caught out by repaying the car, or holiday over the remaining life of your home loan. That’s a big mistake. Assets should generally be repaid over the life of the asset, so the debt can be cleared by the sale of the asset.

       5. Keep your bills and day to day spending at a bank separate to your home loan. Funnel away savings and extra payments into offset accounts that aren’t easy to access.

Ideally every extra cent you have should be in an offset against your home loan. However, if having all your savings, spending money, purchases money, bills, emergency money in one account puts you at risk of all off it blending into one – and you aren’t prepared to run a spreadsheet and stick to it – the risk of dipping into your savings for that luxury spend will outweigh the benefit of keeping your day to day spending money in an easy access bank account far away from your home loan.

         6. Pick a smaller bank with a super competitive rate that offers multiple offset accounts.

If you haven’t gathered from my points above, I’m a big fan of a bank that offers multiple offset accounts. Quite a few banks do, but not all. Make sure you check with your bank or broker when considering options for finance.

  1. Make sacrifices/swaps.

Looking at your finances is a bit like looking at your diet when trying to lose weight! Swapping full cream milk to low fat milk, coke to diet coke. You get my point. There are many swaps you can make to help pay down that loan sooner. Some of my favourites:

  • Think picnics instead of restaurants.
  • BYO restaurants.
  • Dinner parties where everyone brings a dish instead of going out.
  • Bringing lunch from home and eating out one day a week instead.
  • Having a cleaner once a fortnight instead of every week.
  • Choosing to buy clothes on sale or end of season instead of when they first come out.
  • Saving purchases for mid-year and end of year sales (appliances, new linen, etc. – never pay full price).
  • Swap coffees and lunch catch ups for walks/bike rides and healthy free outdoor exercise sessions.

8. Be careful where you make the extra repayments.

If there is any chance you will rent out your property in the future, say for example you bought an apartment as your first property, then wish to hold on to this when you eventually buy a house, or possibly will relocate to another state for work or overseas, don’t make extra repayments into the loan, make them to an offset account. This will preserve your debt balance and allow you to use your savings without ruining your tax position.

Tina Howes

Mortgage & Finance Advisor

SmartMove

Main image: Freepik

Tina Howes