Tips for Repaying Your Mortgage Sooner
Make extra repayments
The most common mortgages for home buyers require you to pay principal and interest. On a typical 25 year mortgage, any extra payments you make in the first five to eight years (when most of your repayments are primarily paying off the interest) are especially good at cutting your interest bill and shortening the life of your loan. Make extra payments as early as you can because these loans are interest heavy up front and the faster you repay the better. Consider making repayments on a weekly or fortnightly basis to reduce interest and the term of a loan.
Mortgage offset account
A mortgage offset account can save interest on your loan. Your mortgage is linked to a savings account into which your salary and other cash can be deposited and from which you withdraw to pay bills, credit cards etc when these debts become due. For the period of time your money sits in this account, it is ‘offset’ against your loan and so reduces your interest bill.
Make an annual lump sum payment
Use your tax refund or a windfall, such as an inheritance or work bonus, and apply it directly to your principal. Check your mortgage documents to find out how often you can prepay and in what amount.
Prepay a little every month
Get a copy of your loan amortisation schedule which will show the breakdown of interest and principal. If you’re making a payment for November, for example, look at the next line down on the principal reduction line and you will see that the principal reduction for the next month, December, is say $24. Making that $24 payment early means that your ‘true’ mortgage balance is one payment less after the principal is prepaid. So in essence, you’d be making an extra payment each year.
A redraw facility allows you to make extra payments and then withdraw them if you need them. You can only redraw the additional payments you make, and sometimes this type of loan may attract higher costs for this extra benefit.
A redraw facility means you can put all your ‘rainy day’ money in your mortgage knowing you can get it out again if needed. You can also use it to save money for a specific purpose such as a car. Competitively priced loans with redraw facilities are increasingly common, but you may still end up paying more. Redraw facilities often charge a fee for each withdrawal, set a minimum amount for each redraw and may limit the number of redraws per year. Consider how often you are likely to ‘redraw’ your money before deciding whether this feature suits you. Using the redraw facility may impact on the tax deductibility of your loan. Please discuss this option with us, your mortgage specialist, and your accountant.
If interest rates drop If you have a variable home loan and the interest rate drops, we recommend you continue to pay the loan at the higher rate. Stay informed Once you have a mortgage, aside from making the payments, it’s easy to forget about it altogether. But staying up to date on interest rates and new products could save you money.
We recommend that you review your mortgage requirements with us on an annual basis. You may want us to shop for a new product that better suits your needs.