While having a home loan is a huge long-term financial commitment, it’s possible to take years off your mortgage by maintaining the savings mentality that helped you get a deposit together.
You did it! You scrimped and saved for a deposit, found the perfect pad, got a mortgage and now own a home. But what now? A lifetime of debt and Vegemite on toast? Not necessarily.
While having a home loan is a huge long-term financial commitment, it’s possible to take years off your mortgage by being smart and maintaining the savings mentality that helped you get a deposit together.
Matthew Clark, a RAMS home loan specialist from Wollongong in New South Wales, and savings expert Kylie Travers, who runs The Thrifty Issue blog, share four strategies to help you pay off your mortgage quicker.
It’s simple maths; the more you pay in repayments, the quicker the loan – and the interest owed – will be paid off. So try to pay above and beyond what the lender wants, if you can.
Matthew says after “settling in” over a few months, paying just the minimum amount, you should look at paying extra each repayment, whether that’s fortnightly or monthly.
“First, align repayments with your pay cycle or your cash flow will be a mess. Then, once you’ve taken stock of your new situation, have more than the minimum repayment automatically taken out of your account the day after pay day,” he says.
Once you walk through that front door of your first home, the saving shouldn’t stop! Picture: realestate.com.au
This will pay back the loan quicker and build up a buffer, in case your circumstances change. “Most people won’t notice a small extra amount, but it can make a big difference,” says Matthew.
Kylie says paying off more early on is wise, because it reduces the overall interest paid. “Keep up the savings mentality and throw extra at your mortgage,” she says.
“If you have a $400,000 mortgage, at a 6% interest rate, and can pay an extra $50 a week, you could reduce your home loan by five years and six months.
“If you start paying $50 extra a week five years in, you’ll have your mortgage one year and five months longer than you would have paying that little bit extra from the start, plus pay nearly $30,000 extra in interest. Making small contributions early really can pay off,” Kylie says.
While it can be tough, throwing extra or unexpected cash into your mortgage will make a dent in it.
Resist spending on “something fun” if you come into money, Kylie says. It’s short-term pain for long-term gain.
“If you get any lump sum payments, like bonuses at work, a tax return or when you sell stuff you no longer need, put it on your mortgage.” It is worth noting that if you are on a fixed rate home loan, fees may apply (and can be substantial) when you make prepayments on your loan in excess of the prepayment threshold.
Paying lump sums into your first home mortgage could have more long-term benefits. Picture: realestate.com.au
“With a redraw, you park savings or extra money in your mortgage account and this reduces the amount of interest you pay while those funds remain in the account. You can access this money any time,” he says.
An offset account works in a similar way.
“You could again reduce the amount of interest you pay by setting up another account (maybe a savings account) as an offset account and linking it to your home loan. Then, any money in that account is offset against your outstanding loan balance, reducing the interest payable on the loan,” Matthew says.
“Say you have $10,000 in savings. You put that in an offset, next to your mortgage, where you owe $400,000. While those savings remain in the offset account, the amount you would pay interest on is now $390,000, not $400,000. And you can still access the money any time.”
Matthew warns against a “set and forget” mentality, saying it’s smart to regularly reassess the suitability and affordability of a loan. Small changes can make a large impact.
“There are different ways to change your loan, it may be fixing your interest rate or switching to a variable rate or even re-financing when your circumstances or things in the market change,” Matthew says.
Originally published on flatmates.com.au