The mortgage on your own home (or the family home) is one of the biggest expenses you will incur each month and the quickest way you can achieve financial security is to pay it off as soon as possible. The quicker you pay it off, the less interest you pay to the banks and the sooner you can benefit from capital growth without a balance owing.
Our friends at Resolve Finance were recently able to provide some useful and easy tips for all homeowners to help you pay off your mortgage sooner. They include:
1. Repay your mortgage fortnightly
If you are currently expending a big instalment each month, instead pay half of that sum every fortnight. Why? Well, there are twelve months in the year but 26 fortnights. So, if you currently pay $2,000 a month you would repay $24,000 a year but if you switch to paying $1,000 a fortnight you end up knocking $26,000 off your loan in the same period.
2. Round up your loan
Another easy strategy is to make your repayment figure nice and simple. For example, if your current fortnightly minimum is $834, round it up to $900. Given a $300,000 loan at 6.0% and with a 30 year term, this would save almost $75,000 in interest over the life of the loan and shave more than five years off the term!
3. Use an offset account
An offset account is a popular tool that can save thousands and years off your home loan when used effectively. It basically works like a standard transaction account but whatever amount you have in there counteracts against the loan balance. So if you have $10,000 saved in your offset account and $200,000 remaining on your loan you will only be charged interest on $190,000. It won’t change your repayment amount but a greater portion will be attributed towards the principal rather than the interest.
4. Make the most of lump sum repayments
Whenever you come across some extra money – bonus, tax return, inheritance, lotto win – put it towards your home loan, or at the very least in your offset account. The same logic applies if you get a pay rise. If possible dedicate some of the extra income towards your mortgage. These small chunks now will have a big impact in the long run.
5. Get a ‘Home Loan Health Check’
Every two years or so it’s recommended you review your current deal. With new products constantly entering the market there may be one with a better rate and fit for your lifestyle later down the track. Resolve Finance can assist you with this process and will be able to tell you exactly what mortgage products might be better suited for your needs.
6. Don’t reduce your repayments when interest rates are cut
This handy hint wasn’t on Resolve’s list but another tip is to stay strong and avoid decreasing your fortnightly or monthly repayments if the banks pass on interest rate cuts. If you have held a mortgage during the past two years, chances are (like the rest of us) you have enjoyed receiving regular letters from the bank to advise the interest rate cuts are being passed on and your repayments are being reduced. Similar to ‘rounding up’ your loan, refusing to drop your repayments will enable you to get ahead, repay for home loan sooner or at least create an extra buffer for when rates start to rise again or if you suddenly need funds in a hurry!
7. Beware of low introductory rates
If you are shopping around to compare your current loan (or if you are looking at taking out a new home loan), beware of loan introductory interest rates. Many lenders will offer a below-market rate for the first few years to attract customers before the loan jumps to a higher rate for the remainder of the loan. This can be risky as you will be paying a higher rate for the longer length of your term. The devil is in the detail so be careful!
8. Use equity in your home loan to invest
If you have been diligent and managed to repay extra on your home loan, or if your property has increased in value, you will have equity in your property. Equity is the difference between the current market value of the home and how much you have left owing on your mortgage.
If you have equity in your property, the banks will often allow you to use that equity as a deposit to borrow more money. It may sound risky but if you are cautious (and smart), you can use that equity to borrow money to purchase an investment property. Now this is where you can start to make a serious difference to your financial position and personal wealth.
9. Invest to get ahead
One of the biggest opportunities available to you to help you get ahead is simple – invest.
Investor Assist is here to help you to look beyond the simple strategies to help repay your own mortgage faster and look at the bigger ‘wealth creation’ picture. If you earn a fixed income or salary each year, there are limits to how much disposable income you have available and how quickly you can repay your mortgage.
However, if you are able to implement a successful investment strategy, you have the potential to own investment properties which will cost you a minimal amount each month (even as little as the cost of a cup of coffee per day), yet they could prove extremely lucrative in the long run. The good thing about property investment is that there is no limit to how much you can earn!
If your investment property is positively geared, you can use the surplus income to help pay off your own home loan sooner. Or, if your investment property increases in value over time, when you decide to sell the property you are able to use any lump sum profit to pay off your own mortgage.
Imagine if your investment property increased in value and in ten years’ time you were able to pay a lump sum of $200,000 (or more!) off your own mortgage when you decided to sell? Besides winning the lotto, receiving a large inheritance (or robbing a bank!), I can’t think of any other scenario which would enable you to make such a large difference to your repayment schedule. It is one of the best ways you can achieve financial security sooner.
10. Don’t try to pay off all your home loans at once
If you do have a mortgage on your own home, as well as investment loans, it is important to remember that the same rule does not always apply and you should not necessarily be trying to pay them all off as soon as possible.
Your own home (or the family home) is always the priority and you should aim to pay off this loan as quickly as you can. Investment loans however, are different.
When you own an investment property you have gearing options available to you that allow you to negatively or positively gear your property, depending on your investment objectives. This means that your property will either make you money each month (positively geared when your rental income exceeds expenses) or run at a loss (when rental income does not cover expenses).
Some investors even decide to repay the ‘interest only’ component of their loan (rather than principal plus interest) which means the value of their home loan never reduces and they are solely relying on the property to increase in value to make money. As a property investor, there are many options available to you and you should speak to your accountant or financial advisor to devise the best investment strategy for your individual circumstances.
For further information about investment opportunities available to you, contact an Investor Assist Property Investment Specialist today.
Alternatively, we can put you in touch with one of the financial experts at Resolve Finance to conduct a ‘Home Loan Health Check’ to make sure you have the best product on the market. Just let us know and we will be happy to make the introduction!