Home Loan Strategies

And, ten years into paying off a $200,000 mortgage (at around $1300 per month) on a 25 year loan term, you still have a whopping $153,000 (give or take a few dollars) to pay back to the bank (based on a standard variable interest rate of 6.00%).

So, is the eighth wonder of the world being able to repay your 25 year home loan off in half that time?

Maybe and maybe not, but below are seven strategies in which you can at least help reduce that eternity into a more palatable time frame.

Don't lock yourself into an inflexible loan

Even though interest rates are predicted to rise, those doing the predictions predict that they will not rise more than 1.0% in total over the medium term.

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Sure, variable rates might be the lowest in 30 years but that is not the same with fixed rates. 

For example if you fixed the interest rate on your loan for, say, five years, you'd be paying over 1.0% extra in interest from day one - the average five-year rate is 7.47%, compared with the standard variable rate of 6.07% at banks. 

Locking in to a fixed rate like that may not be a good move if you want to reduce your mortgage. 

Even more so since most analysts expecting rates not to rise by more than 1.0% anyway.

If you want to "fix a higher rate", fix it yourself

What this means is why not start paying off your loan as though you were on a higher fixed rate even though you are not. 

The extra you are paying will come directly off the principal on your loan - giving you a buffer for when rates finally increase to that "fixed rate".

Shop around for a flexible mortgage 

If your goal is to pay extra into your mortgage so it disappears faster, you need a mortgage that will allow additional repayments and have a redraw facility to be able to get the extra payments back in emergencies.

Remember, pay your lower interest rate loan off at the a higher rate (as mentioned earlier) if you can. 

The important thing to remember is that whenever you have some extra money, never put it in the bank where it will earn little interest that will then be taxed. 

Put it directly into your mortgage, and take it back when an expense crops up.

Budget 

Once you've got a cheaper rate; make the most of it.

Keep the pressure up in other areas. 

By cutting back on a few luxuries or extra's- such as that pizza you pick up for the convenient meal on the way home from work, or that extra bottle of wine, or ?? - Your savings will mount up.

Don't bank your savings or any recently discovered unknown inheritance or windfall 

Make them go further by paying them straight into the mortgage. 

An extra $40 a month on a $200,000 25-year home loan could save you $14,000 in interest and slash 20 months from the life of the mortgage, or a lump sum deposit of $10,000 could reduce it by a further 28 months.

Make fortnightly instead of monthly repayments

There are 26 fortnights each year Basically by doing this, you're making an extra repayment without knowing it.

Paying twice a month gives you 24 payments, but fortnightly, 26.

Have your salary paid directly into your mortgage and draw down your expenses as you need them 

Or better still, set up your mortgage as a line of credit, linked to your credit card. 

Deposit all your income directly into your mortgage and pay for all your expenses by card. 

Once a month arrange for a sweep from your mortgage to repay your card in full and (especially if there is an interest free period) the difference between your income and expenses more than likely becomes your repayment for the month. 

This strategy has the potential to save you much interest, even if you have to fully draw down your line of credit from time to time to cover those extraordinary expenses.

Simple strategies like those outlined above do make it possible to reduce the term of your mortgage. 

After all, it is not the interest rate that counts, it is how much principal outstanding on your loan that you are paying interest on which will ultimately determine how much interest you pay - and how long you will be paying for your home loan.

Maybe there is an eighth wonder after all!

Published: Sunday, 1st Aug 2021
Author: 2