This article was built to help you on your success journey.
1. Skip the honeymoon
Beware of lenders bearing gifts. Introductory or honeymoon rates have long been an important marketing tool for lenders. You are initially offered a cheap rate on your loan to get you in the door but once the honeymoon period is over, the lender will switch you to a higher variable rate of interest.
There are two problems with this scenario. First, the variable rate is often higher than some of the lower basic loans available so you could end up paying more. Second, you need to clearly understand that a honeymoon rate applies only for the first year or two of the loan and is a minor consideration compared to the actual variable rate that will determine your repayments over the next 20 or so years.
You may also be hit with fairly steep exit penalties if you want to refinance in the first two or three years to a cheaper loan. So make sure you ful y understand what you are letting yourself in before setting off on a “honeymoon” with your lender.
2. Make repayments at a higher rate
A good way to get ahead of your mortgage commitments is to pay it off as if you have a higher rate of interest. Get a loan at the lowest rate you can and add 2 or 3 points to your repayment amount. So if you have a loan at about 7 percent and pay it off at 10 percent, you won’t even notice if rates go up. Best of all, you’ll be paying off your loan quicker and saving yourself a packet.
Success story Harry Charalambous - Transformed Our Lives To Make Way For The Goals To Be Realized
3. Pay it off quickly
Time is money. There are all sorts of strategies for paying less interest on your loan, but most of them boil down to one thing: Pay your loan off as fast as you can. For example, if take out a loan of $300,000 at 7.07 percent for 25 years, your repayment will be about $2,134. This equates to a total repayment of $640,126 over the term of your loan. If you pay the loan out over 10 years rather than 25, your monthly payment will be $3,494 a month (ouch!). But the total amount you wil repay over the term of the loan wil be only
$419,290 – saving you a whopping $220,836!
We paid off $596.000. Saving us $70,000 a year with Roy’s basic strategies
4. Make more frequent payments
The simple in life are often the best. One of the simplest and best strategies for reducing the term and cost of your loan (and thus your exposure should interest rates rise) is to make your repayment on a fortnightly rather than monthly basis. How can this make a difference I hear you ask? It works like this:
Split your monthly payment in two and pay every fortnight. You’ll hardly feel the difference in terms of your disposable income, but it could make thousands of dol ars and years difference over the term of your loan. The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference.
Using our example from above, by paying monthly, you will need to repay $640,126 over the term of your loan. By paying fortnightly, you wil save $48,534 in interest and 4.5 years off the loan. Zero pain to you, major benefit to your pocket.
5. Hit the principal early
Over the first few years of your mortgage, it may seem that you are only paying interest and the principal isn’t reducing at all. Unfortunately, you’re probably right, as this is one of the unfortunate effects of compound interest. So you need to try everything you can to get some of the principal repaid early and you’l notice the difference. Every dollar you put in your mortgage above your repayment amount attacks the capital, which means down the track you’l be paying interest on a smaller amount. Extra lumps sums on regular additional repayments will help you cut many years off the term of your loan.
6. Get a package
Speak to your lender about the financial packages they have on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser or even a fee-free transaction account. While these things may seem smal beer compared to what you are paying on your home loan, every little bit counts and so you can use the little savings on other financial services to turn them into big savings on your home loan.
There are also “professional” packages on offer for amounts over a certain limit, which can be as little as $150,000. There are all sorts of discounts and reductions attached to these packages so make sure you ask your lender about them.
7. Consolidate your debts
One of the best ways of ensuring you continue to pay off your loan quickly is to protect yourself against interest rate rises. If your home loan rate starts to rise, you can be absolutely positive about one thing – your personal loan rate will rise and so will your credit card rate and any hire purchase rate you happen to have.
This is not a good thing as the interest rates on your credit cards and personal loans are much higher than the interest rate on your home loan. Many lenders will allow you to consolidate –
refinance – al of your debt under the umbrella of your home loan. This means that instead of paying 15 to 20 percent on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at 7.07 percent.
As always, any extra repayments or lump sums will benefit you in the long run.
8. Split your loan
Many borrowers worry about interest rates and whether they wil go up but don’t want to be tied down by a fixed loan. A good compromise is a split loan, or combination loan as they are often known, which allows you to take part of your loan as fixed and part as variable. Essentially this allows you to hedge your bets as to whether interest rates are going to rise and by how much.
If interest rates rise you will have the security of knowing part of your loan is safely fixed and won’t move. However, if interest rates don’t go up (or if they rise only slightly or slowly) then you can use the flexibility of the variable portion of your loan and pay that part off more quickly.
9. Make your mortgage your key to financial product
Mortgage products known as al -in-one loans or 100 percent offset loans allow you to use your mortgage as your key financial product. This means you have one account into which you can pay al of your income and draw from your living expenses by using a credit card, EFTPOS or a chequebook, as well as making your mortgage repayments. These types of accounts can make a huge difference to the speed at which you pay off your loan. Because your whole pay goes into your mortgage account you are reducing the principal on which interest is charged. Sure, you might take a couple of steps back as you withdraw living expenses but careful use of this sort of product can get you thousands of dol ars ahead of where you’d be with a “plain vanil a, pay once a month” home loan. These loans work well when you are able to make additional payments towards the loan. If you are only able to make the equivalent of the minimum repayment on your loan (and not put in any extra) you may be better off with a cheaper standard variable or basic variable loan. However, it’s not unusual for dedicated borrowers using these types of loans to cut the term of a 25 year-old loan to less than ten.10. Use your equity
If you have already paid off some of your home, you are said to have equity. Equity is the difference between the current value of your property and the amount you owe the lender. For example, if you have a property worth $500,000 on which you owe $150,000, you are said to have home equity of $350,000, which you can re-borrow without having to go through the approval process by accessing it through your existing loan. Many lenders will al ow you to borrow using your equity as col ateral. Most lenders will al ow you to borrow up to about 80 percent of the loan-to-value ratio (LVR) of your available equity. If you are careful, you can use this equity to your advantage and help to pay off your home loan sooner.
Using an equity loan to improve your property could be a good way to ensure that your home increases in value over time. But larger expenses such as cars and holidays that would have been paid by credit card are more affordable on the lower rate of your home loan.
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