Your home is probably your most valuable asset.
Trouble is? It’s also likely your largest debt.
In order to increase your net worth, and ensure your home is freehold before retirement, paying off your mortgage should be your top priority. With the average mortgage term being 30 years and the ABC reporting that Australians are increasing “…paying down their mortgages later in life“, reducing this timeframe can seem an insurmountable task.
While it may feel insurmountable, that doesn’t mean it’s impossible.
To help, here are a few ideas you can use to reduce your mortgage debt faster.
Compare fees and flexibility
When shopping around for a mortgage lender, make sure you’re comparing apples with apples.
This means you don’t just compare interest rates, but also any fees as well as flexibility around the terms of the mortgage. There can be a huge variance between lenders, so make sure you’re getting the best deal for your situation.
Don’t forget to take into account future scenarios – it’s highly likely you’ll want to upgrade your house within the 30 year loan timeframe, so check out what fees you’d attract when this happens. (In this case, you should be looking for ‘loan portability‘, so if you buy a new home you don’t have to pay exit and establishment fees).
When checking for fees, keep an eye out for:
- Establishment fees.
- Lenders mortgage insurance (LMI).
- Exit discharge fee (when you pay your mortgage in full).
- Early discharge fees (if you pay out your home loan in full).
- Exit penalty interest (payable on fixed loans for early discharge).
- Ongoing fees such as account and transaction fees on the home loan account.
- Late payment fee (if you make a required repayment later than the due date).
- Switch or break fees (If you switch loans e.g. variable rate to fixed rate home loan).
Cut back on your spending
Whether it’s that takeaway coffee each morning on the way to work, attending that concert, or that impulse shoe purchase your just had to have, a little spending here and there can all add up.
Reign in those impulse buys, be a little more financially responsible, and focus on channelling that cash towards paying down your mortgage:
- Take a list with you when you’re out shopping and only buy what’s on the list.
- Try out the 30-day rule. Wait 30 days before buying something to control any impulse buying habits!
- Take the Project 333 fashion challenge and dress with 33 items or less for three months.
- Be creative and recycle, repurpose, and reuse household items wherever you can.
Pay fees separately
Establishing a mortgage incurs a number of fees, for example an establishment fee, Lenders Mortgage Insurance (LMI), account and valuation fees. Pay these up front rather than adding them to your mortgage to avoid paying additional interest on these over the longer term.
Avoid adding debt to your mortgage
Buying a new car and considering adding the car loan to your mortgage?
You might be thinking that with home interest rates being so low, a mortgage top-up is the cheaper option than car finance options. But think again!
The extra amount you loaned to pay for your car increases the amount of interest on the repayments you make over the term of your mortgage, as opposed to paying off the vehicle loan quicker. Say, in five years.
It’s a long-term cost for a very short-term gain.
Pay a bigger deposit
The more you can pay up-front, the less interest you’ll pay in the longer term.
Empty the piggy bank, start a side hustle, and do whatever it reasonably takes to maximise your deposit amount.
You’ll be thankful in the future!
Maintain payment levels
If interest rates drop, don’t be tempted to let your home loan repayments lower to the minimum required payments so you can stash the difference.
Instead, keep your mortgage repayments at the same amount and pay off more interest, faster.
Make payments fortnightly
Choosing to make payments weekly or fortnightly rather than monthly can result in savings on your mortgage. How does it work? There are 52 weeks in a year, so if you pay 26 fortnightly payments, that’s in effect 13 monthly payments – a whole extra month of home loan repayment in a year!
Increase your regular payments
Think of your home loan repayments as a minimum payment. Spending less or earning more income can help you find extra cash to put towards your mortgage as additional payments. These extra payments directed toward your mortgage can help you repay your home loan faster. You’ll be debt free in no time!
Consider offset facilities
An offset loan is where the cash in your savings account offsets the amount you owe on your home loan. Mortgage interest is calculated only on the net balance of the loan, minus the savings account.
This type of loan can significantly reduce the amount of interest you have to pay on your mortgage.
Your home, all yours, faster
By being smart with your cash and understanding the ins and outs of your mortgage terms, you can stand to make significant savings on your home loan. Take advantage of these opportunities, and you’ll be debt-free faster and able to reap the rewards of home ownership sooner!