Paying it Forward: 7 Tips to Reduce the Life of Your Loan
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While taking out a loan for the first time can be incredibly exciting, it can also be intimidating when thinking about the 25-year debt looming overhead. While some people choose to chip away at their loan in the required increments, there are ways you can tackle repayments that allow you to shave a few years off the loan’s lifespan. Depending on your preferences, you need to ask yourself whether cruising through repayments on autopilot is more beneficial when you have multiple opportunities to make serious headway in paying off your mortgage sooner.
1. Skip the honeymoon
While the introductory rates lenders offer may seem beneficial in the beginning, these low rates only last a one to two-year period. Usually after that time, the rate increases dramatically, and you end up paying more in the long run. By skipping this period, it may serve to allow you to save money in the future. Instead, in the first few years of your mortgage, make extra repayments as early as possible so you save on compound interest down the track.
2. Make extra repayments
If you have spare cash or receive a significant money lump sum (tax returns, bonuses, etc.), it is advisable you funnel the extras into your mortgage repayments. It may allow you to save interest over the life of the loan. On receiving a pay increase, it is beneficial to also increase your repayments rather than spending the extra cash. In the case where interest rates fall, don’t lower your minimum repayment amount – use the opportunity to pay off your mortgage faster.
3. Ask for a package deal and keep on top of the market
Before deciding on a loan, don’t forget to ask the lender of package deals they have on offer. These packages commonly include discounted home insurance, free consultation with a financial adviser, and fee-free credit cards. While this does not directly impact on the loan, it will allow you to save money in other areas so that you can put it towards paying off your mortgage sooner. By keeping on top of changes in the market, you can follow the best rates and deals you can take advantage of in the future.
4. You can split your loan
If you are unsure whether to settle with a fixed or variable rate for your loan, you have the ability to divide the whole into two separate loans. This will allow you to take advantage of a lower, fixed rate over the life of the first loan as well as change the frequency/amount of repayments on the variable second one. You would simultaneously have the security of one loan remaining fixed if interest rates were to rise, as well as the ability to increase repayments if rates are stable.
5. Align your mortgage repayments with your income cycle
Instead of paying monthly, you have the ability to make repayments fortnightly. Robert Projeski, Australian Mortgage Options managing director, told YourMortgage.com making repayments fortnightly “cuts down on interest payable and will save you a lot of money over the course of your home loan.”
6. Use an offset savings account to offset your loan
By using a savings account, you may be able to reduce the overall interest payable on your mortgage. The amount of money in your savings account, which would ideally earn interest at the same rate of your repayments (100% offset), can be subtracted from the interest you pay on your mortgage. Take a $300,000 loan for example. If you have $50,000 in savings, you may only need to pay mortgage interest on $250,000. By using this method, you may substantially reduce the amount of interest you pay, as well as the overall life of the loan.
7. Sacrifice minor luxuries and set a budget
By doing something as simple as bringing your lunch to work instead of purchasing it can save more than $50 a week. It is these minor luxuries that rack up quite a bit of money at the end of the year – something which could have been used to reduce the life of your loan. In a previous post, we discussed how to budget effectively. By setting a budget, you can keep track of your cash and use the savings to put towards your mortgage.
Here at Select, we are here to tailor deals to suit our client’s needs. We offer free, no-obligation, and quality advice so that you can reach your financial goals. If you have any queries about how you can reduce the life of your loan, give us a call on (08) 9417 3399 or send us a message to organise a free appointment with one of our friendly brokers.