Home Loans – How to slash 10 years off your mortgage
Home Loans – Slash 10 years off your mortgageOwning a home is part of the Aussie dream but with loan terms of 20-30 years it's a big financial commitment. Here are some tips that help you save more of your hard earned money and slash years of your home loan. 1. Use an offset account:
This method of reducing debt has been around for years and the concept is simple: most Australian home loan borrowers have a savings account which at the end of the financial year you have to have to declare any interest earned and pay tax on it. Even if you only have a small savings account you can use this money to cancel out home loan debt. By linking an offset account to your home loan you effectively pay less interest by offsetting it against your savings.
For example, if you have a $250,000 home loan and you have $5,000 in savings you will only be paying interest on a home loan of $245,000, and because offset home loan lenders calculate interest daily, every dollar works hard to reduce the cost of borrowing. 2. Make extra repayments:
Let’s face it, everyone knows time is money! Paying off your home loan faster is probably one of the smartest investments you can make. Let's say you have a $250,000 home loan taken out over a 25-year period, with an interest rate of 7%. If you make extra home loan repayments of just $250 a month you could save a massive $68,642 in interest off payments and knock almost six years off the life of your home loan. Whenever you have any extra money it makes sense to use it towards your home loan, it makes a huge difference to the amount of interest you eventually pay, and every extra dollar helps. 3. Consolidate your debt and savings:
Most people have a few different savings accounts or loans. To maximise your money try refinancing your home loan by rolling together all your debts, including your credit card and maybe a personal loan. Many lenders will allow you to consolidate or re-finance your debts under the umbrella of your home loan. So instead of paying 12 to 18% on your credit card or 8-12% on a personal loan, you can transfer these debts to your home loan and pay it off at a lower rate 6- 7% interest. This will also help protect you against interest rate rises. 4. Make your home loan repayments fortnightly:
Make your home loan repayments every fortnight instead of monthly.
Your fortnightly mortgage payments work out at half of your monthly payment rate. If you get paid fortnightly then it can be convenient to pay your mortgage payment shortly after each payday. This well known method works beacuse there are 26 fortnights each year, but only 12 months. By paying fortnightly you are effectively making 13 monthly payments every year. You end up saving thousands of dollars in interest payments and will knock years off the term of the loan. On a $250,000 loan with 7% interest you could save $37,338 in interest and almost 4 years off the loan by paying fortnightly instead of monthly. 5. Have your salary paid directly into your home loan:
Then you will only have to withdraw the money you need and all the rest is going towards reducing your home loan. In order to do this you will need to ensure your home loan offers a free redraw facility. You can extend the period between your income getting paid and making a redraw by using a credit card for all your everyday expenses. Using a credit card you can have up to 55 days interest free before needing to redraw the funds from your home loan and pay off your credit card bill. You will really start to save big money when you budget and ensure you only withdraw what is required. This way you are making extra repayments every time you get paid. 6. Shop around and do your homework:
Make sure you have looked at what different banks are offering in terms of interest rates and package deals and make sure you approach several home loan brokers as they all have different packages available to them. Some packages have savings accounts with unlimited transactions and no monthly fees, no annual fee credit cards or a free consultation with a financial advisor. Work out what things are going to benefit you most and get that included in your package. 7. Get a split home loan:
One major decision when choosing a new home loan is whether to go for a fixed or variable rate loan. Variable rates offer more flexibility and tend to allow for more extra repayments, yet there is a risk that interest rates may rise over time requiring increased repayments. On the other hand, fixed loans are less flexible with extra repayments but offer certainty that the interest rate will not change for a fixed period of time. This is useful for budgeting and planning. Loans can typically be fixed for anywhere between 1 to 5 years. The good news is that you can have the best of both worlds with a split or combination home loan. This is where part of your home loan is fixed and part is variable. For example, if taking out a $300,000 loan you could fix $250,000 for the first 2 years and have $50,000 as variable. During that first 2 years you should try and pay off as much as the variable as possible. After two years you could then restructure again with part variable and part fixed. 8. Don’t get tied down – Up to 30 years with the same home loan lender is a big commitment.
Check how portable your home loan is and what exit fees are charged. New lenders and offers come on to the market all the time and a more suitable product than you initially take up may become available. While a home loan is not the kind of product you’re likely to switch often, moving to a superior product can save thousands of dollars in the long term. 9. Beware of fees and low introductory offers (Read the fine print)
Make sure you read all the terms and conditions before deciding on a loan. Some lenders may have penalty fees for paying off lump sums or additional repayments. Also beware of fees such as early exiting or refinancing. You may decide to buy a new house or switch to a cheaper loan in a few years so make sure you know what you are letting yourself in for, this will help you choose the home loan that is the best for your needs. Some lenders also offer a cheap rate of interest to reel you in as an introductory offer. Make sure you don't then get stuck paying off a higher interest rate when this finishes. It might seem good at first but you need to weigh up what offers the best value over the term of the loan. 10. Make extra repayments early:
In the first few years of paying off your home loan you are mainly paying interest and unfortunately the principal doesn't reduce much at all. To make every repayment count, try to hit the principle early by paying any extra repayments you can afford. The earlier into you loan you make extra repayments, the more you will save. The short term pain is worth it as you will notice a big difference and actually be paying off more of the loan rather than just interest. A colleague of mine worked out he could save an extra $3,200 just by bringing his lunch to work and cutting down on expensive coffee's by bringing his own plunger. Remember every extra dollar helps and the additional repayments will cut years off the life of the loan! Australian Home Loan / Mortgage Related Resources: Aussie Home Loans - Request a free mortgage broker apointment
MyRate Low Interest Home Loans - Very competitive Australian lender, no fees, simply online application
 Fast, Simple & Free Home Loan Comparison Report
Debt Consolidation: Consolidate your existing credit card debt with a line of credit loan
Virgin Money Credit Card: Low interest credit card, No annual fee and 55 days interest free
For additional information on credit cards or related topics please visit our library of credit card articles.
|
