A new financial year can be a great time to set money goals, such as paying down a home loan. Paying off a mortgage early can save on interest, free up cashflow each month and help you enjoy all the benefits of a debt-free lifestyle.
If reducing your mortgage debt is a key financial goal for FY20, here we provide some tips to kick-start your plan.
Make fortnightly payments
Instead of making one monthly payment, you can instead opt to make a half-sized payment every two weeks. Because there are 26 fortnights in the year, this strategy will result in you making an extra monthly payment every year.
Let’s look at some real-life numbers. If you had taken out a 30-year loan of $400,000 at an interest rate of 4%, making fortnightly repayments would save you around $45,000 in interest payments, shaving four years and one month off your mortgage. That’s an impressive outcome for a relatively minor change.
Increase your monthly repayment while rates are low
Another potential strategy to get the mortgage off your back sooner is to simply increase your monthly home loan payments. With interest rates at historic lows, there has never been a better time to reduce the principal on your mortgage, so make hay while the sun shines.
On a 30-year mortgage of $400,000, increasing repayments by $100 per month would cut 2 years and 7 months off the loan, resulting in an interest saving of $27,500. And don’t forget that adding any windfalls such as bonuses or an inheritance to your home loan can also take you closer to your goal.
Just check with your lender before changing your payment amount, as there may be limits on the amount of additional repayments you are allowed to make, particularly if you have a fixed rate loan.
Use an offset account
An offset account is a transaction account that is connected to your home loan. Any funds held in your offset are subtracted from what is owing on your mortgage before your interest repayment is calculated.
Holding any savings in your offset account and having your wages paid into it every month can be a great way to save on interest. Offset accounts also offer financial flexibility as the funds can be withdrawn at any time.
Consider consolidating your debts
If you have debt outside of your home loan, such as a car loan or credit cards, a debt consolidation home loan could help to simplify your affairs, as well as saving money.
As personal loans and credit cards will generally have a much higher rate of interest than your home loan, consolidating all of your debt into your home loan makes good financial sense.
While in the short-term this will mean the amount you owe on your mortgage actually increases, over the long-term the interest savings accrued could be used to increase your repayments on your mortgage.
Protect your repayments
When you take on a home loan, you are expected to pay off most of this significant outlay over the course of your life. However, unforeseen events can happen which can derail your plans.
Most lenders offer mortgage protection insurance, also known as home loan insurance or consumer credit insurance, which covers your mortgage repayments in the event of involuntary loss of employment, serious illness or death.
As some of these policies exclude part-time, casual and contract workers, speak to your mortgage broker about the cover that best suits your needs.