17 handy tips for paying off your mortgage quickly
If you’re looking for home finance it pays to talk to a Loan Market mortgage adviser who can help you understand what your home loan options are as well as set up your savings scheme with the right bank for you.
1. Make extra repayments
Both consistent and ad-hoc additional repayments such as bonuses and tax returns work to reduce the principal on your mortgage faster. The earlier in the loan term you begin making additional repayments, the greater the benefit in terms of time and money saved.
2. Make your first repayment on settlement date
Your first home loan repayment will generally fall due one month after settlement. Making your first repayment on your settlement date reduces the principal before the first lot of interest accrues on the amount you have borrowed.
3. Make extra repayments right from the start
Regular additional repayments made right from the beginning of your loan term will have a much greater effect on the overall time and cost of your loan than starting five or ten years into the loan. Even if you are already more than five years into your loan term, you can still make a considerable saving by starting to make additional repayments now.
4. Make repayments more often
If your loan repayment amount is calculated monthly, you can make significant additional savings by halving your monthly repayments and paying fortnightly instead. This method will result in you paying an additional month’s worth off your mortgage every year, reducing the principal faster. Use this loan repayment calculator to find out the difference in loan repayment amounts.
Check the fine print in your loan documents to ensure your lender has not calculated your fortnightly repayments to equal half what the monthly repayment would have been, as this will not save you in time or money. Use the extra repayments calculator for an indication of how much you could save with different repayment amounts.
5. Look for a cheaper rate with good flexibility
The easiest way to pay your loan off sooner is to find a lower rate than the one you currently have, but maintain (or even increase) the amount you pay each month. Look for a loan with a low rate that has the flexibility you require to make additional repayments. There are a number of lenders whose rates differ significantly from the major banks’ rates that still offer good flexibility, but if you are going to refinance, make sure the costs of doing so don’t outweigh the benefits.
6. Pay loan fees and charges up front
Pay establishment fees, legal fees and Lenders Mortgage Insurance (if applicable) up front rather than capitalising them into your loan. This will save your thousands of dollars in interest over the loan term.
7. Look for loans that offer features without a charge
Some loans will charge a fee for every redraw or extra repayment, to switch from a variable to a fixed rate, to port your loan to another property, take repayment holidays etc, but some won’t. You can save the cost of fees if you know what you’re likely to use and find a loan that doesn’t charge you to use it.
8. Negotiate to make savings
You may find this more difficult now due to the current global credit situation, but you can still make some useful savings by negotiating with your lender on things like interest rates and fees. Your local mortgage adviser will be able to help you focus on the area you are most likely to achieve a saving, but as a guide, interest rates and establishment fees in particular are good places to start your negotiations. Good savings and credit history and good work history will help you here.
9. Cut back on expenditure
Reduce expenditure on vices and redirect the money into your home loan instead. Smoking, an after-work beer, morning coffee and that afternoon chocolate fix all add up over the course of the week. Add to that buying at least one lunch, breakfast or dinner a week and you could be putting more than $50 extra a week into your loan.
10. Look outside the big banks
The big banks aren’t the only, or even the best, places to borrow money. Many smaller banks and specialist lenders have very competitive loans available. Just because you haven’t heard of a lender doesn’t mean they aren’t a reputable lender – your mortgage adviser will know which lenders are credible and suitable for your situation.
11. Home loan portability
A lot of people don’t stay put in the one place for the 25 or 30 years their loan covers. Many home loans offer a feature called loan portability, which allows you to transfer your loan to a new property when you move on. Because it’s the same loan, you avoid the cost of paying exit and entry fees.
12. Set up an offset or salary credit account
Loans with offset facilities allow you to have your salary paid directly into the offset account which reduces the interest you pay on your home loan. The balance of the account is ‘offset’ against the balance of the loan for interest calculations and because you pay interest daily, this can save you a lot of money over the long term.
13. Align your repayments with your income cycle
If you have an offset account, changing your repayment dates to match your income cycle helps you to take advantage of the money sitting in your account for as long as possible.
14. Don’t lower your repayments when interest rates fall
When interest rates are falling, it may seem tempting to let your home loan repayments keep pace with the minimum required repayments and pocket the difference. Before doing this, consider that keeping your repayments at the old level will shave a significant portion of principle off your loan, particularly if rates continue to drop.
15. Review your loan regularly
Reviewing your loan regularly will help you to assess its effectiveness and take steps to correct any waste if necessary. Being on top of changes rather than waiting months or even years will potentially save you a lot of money.
16. Make use of internet banking
The convenience and cheapness make this an ideal tool to arrange your finances in a way that is most beneficial to you. Schedule payments to go when you derive the most benefit in terms of your home loan.
17. Combine for more saving power
Trying two or more of these tips in conjunction can ramp up your savings dramatically.