How to cut 10 years off the life of your mortgage
Make additional repayments
Making additional repayments beyond what’s required in your minimum monthly repayment is one of the best ways to reduce the total interest paid and term of your loan.
Consider either one-off lump sum payments when you have spare cash or commit to increasing your regular repayment amount. Even $5 extra each week can save you thousands of dollars in interest over the life of the loan and reduce your home loan term. However, make sure that your loan allows you to make additional repayments without penalty. Fixed-rate and basic (or ‘no-frills’ loans) often have restrictions on extra repayments or charge a fee for the privilege.
Make your surplus cash work harder
If you have a home loan at seven per cent, every extra dollar you pay off the principal is another dollar you are not paying seven per cent on each year. If you instead put that extra dollar into a savings account you are only going to earn two or three, perhaps five per cent at the most.
Therefore putting savings into your loan earns you twice as much as a savings account. Redraw facilities available on most standard variable loans allow you to take back those extra payments if needed.
Save interest with offset accounts
Offset accounts not only save you interest paid on your home loan, but are great for tax purposes as well.
Savings held in offset accounts are subtracted from the outstanding loan amount each month so interest is charged only the net amount. Interest paid in cash to your savings account is taxable, but the same interest used to offset home loan interest is not – a tax effective way to reduce your home loan. However, to get the most from an offset account, look for accounts that offer a ‘full offset’, ie. paying interest at the same rate charged on your home loan. Redraw facilities and line-of-credit loans make use of your savings in much the same way.
Consolidate your debts
As interest rates rise on home loans they also rise on personal loans and credit cards. Consider rolling all debts into your home loan. There’s more than one benefit to this strategy.
Firstly you could end up paying less interest because home loan interest rates are often much lower than personal loan, credit card and store account rates.
And by reducing your monthly repayments into just one home loan repayment you could reduce your monthly commitments so that you have extra cash available to make additional repayments off your home loan. This option requires discipline around future use of credit cards and store account, such as reducing limits or closing the account.
Factor further rate rises into repayments
It is a good idea to factor in further rises in interest rates and, if possible, start making contributions at the higher rate. It will ease the stress when repayments do increase and will also put you ahead of the scheduled loan term – as will extra contributions. Alternatively, if rates decrease you should keep your repayments at the higher amount to enable you to pay off your loan sooner.
^Paul – Lending Services Manager