Home loans can be stubborn beasts.
Unfortunately, there is no quick and easy way of getting rid of them. Fortunately however, there are some strategies you can use to reduce your home loan faster. Here are my suggestions to get your home loan under control and keep it that way;
- Use 100% offset – This allows the borrower to use a transaction account to reduce interest on their loan. Say you have $30,000 in your transaction account and a $200,000 loan – that means you only pay interest on $170,000 as long as you keep the $30,000 in your account. A good tip is to have your salary paid directly into your offset transaction account. By doing this, as soon as you are paid, you are saving interest – it might only be a modest saving but there is almost no effort in doing this so it is worth setting it up.
- Choose Principal and interest – If your goal is to repay your loan quickly, don’t choose an interest only loan. Principal and interest payments are a built in discipline as you are chipping away at your balance every month. If you budget for it and make it the first thing that comes out of your salary, it means you inch closer to owning your home sooner.
- Set repayments higher than the minimum required repayment – This follows directly on from point 2. If you can afford to make higher regular repayments, it will set you up perfectly to pay your loan faster. It’s a discipline and hopefully you will get used to the higher repayment amount and be able to build a budget around it.
- Make extra repayments – Simply, every dollar you pay into your loan will help both by reducing the principal loan amount outstanding and also by reducing the monthly interest bill. If you come into some cash via selling something online, a Christmas Gift or any other way, rather than spend it, put it on your mortgage. If you need the money back, most loans offer a redraw facility but while the money sits in the loan account, you save on interest.
- Interest Rates – Yes a good cheap interest rate matters and it is important to shop around (or more importantly, let your Mortgage Broker shop around!) to get the best rate possible. Every dollar saved in interest will help keep your loan under control and potentially pay it off sooner. However, beware! The cheapest rate might not be the best. It may not even be cheapest when you add in monthly/annual fees which is why banks have to display a ‘comparison rate’. Cheap/introductory rates also may not offer the benefit of 100% offset.
- Make fortnightly repayments instead of monthly – As there are 26 fortnights in a year, you will be effectively making the equivalent of 13 months repayments in a year. And if you are paid fortnightly it will actually help you with your budgeting.
- Consolidate debts – It’s much easier to have one repayment than several and it can save you money. Home loans have the cheapest interest rate so you should bring all your debts together under one repayment. There is one big catch to making this work. If you consolidate your credit card debts into your home loan…. Cut your credit card up or reduce the card limit significantly. This way you won’t pile on credit card debt again.
- Review your mortgage – if you haven’t reviewed your current mortgage for a couple of years it’s worth having a look at. The market changes often and different banks are always coming in with cheaper rates and great feature products that could be just right for your needs – so take the time to engage a broker and make sure your mortgage is working for you.
- Stick to a budget – Remember if you’re aiming to make the most of some of the above strategies, there isn’t much point in doing all the hard work and then running up a credit card bill. Discipline is the key to paying down a home loan. It won’t happen by itself and if meeting repayments means you are living beyond your means – you need to take a look at your budget (or create one if you don’t have one!)
- Pay yourself first – This relates directly to point 9 but what does this mean? When you get paid, pay your loan repayment first. Then look at what you have left to live on. Don’t spend first and then fall short on your loan repayments – you just won’t get to your goals that way.
Of course, everyone is different and if you have any questions or would like to see if you have the best loan for your individual needs, let me know. I’d be happy to help.