January 22, 2014
Yew Kong Lye
Now that the New Year is upon us, it would be interesting to find out how many people are sticking to their new year resolutions or, at least, having a good go. No doubt, many would have resolved to pay off their home loans sooner and to have that proverbial noose around their necks taken off sooner rather later. Maybe, starting to lead your dream life can start then. Here are 10 tips to help you achieve that and it is by no means exhaustive.
1. BE EDUCATED
Majority of people take on a huge home loan commitment without understanding the basics of a home loan, things like:
- legal obligation
- loan term
- principal & interest or interest only repayments
- how banks calculate loan interest
- what fees do bank charge; etc.
My mind boggles when I often ask clients what is their home loan interest rate and they absolutely have no clue. It’s insanity! This is like walking into a car yard for your next car and telling the salesman to charge you whatever he likes.
Information like that is readily available on the internet or from a good mortgage broker. Buying a home is the single biggest decision anyone will make and you owe it to yourself to get an education for getting into the commitment.
2. PREPARE A BUDGET
Robert Kiyosaki said “It’s not what your earn but, what you keep” when speaking about how much you have left over from your wages after bills and expenses to put towards repaying debts and investments.
Personal budget templates are easily available on the net and find one with an exhaustive list of personal expenses. Add to the list of expenses any of your personal expenses that are not found in the template. Identify in the list of expenses, what is fixed and what is discretionary.
Fixed expenses, e.g. utility bills, are expenses that cannot be avoided completely. Discretionary expenses are those that can be avoided and are mainly spent on lifestyle. In this group of expenses, determine the expenses to maintain a reasonable lifestyle and the expenses which are somewhat frivolous.
By reducing or eliminating such frivolous expenses, you will find great areas where you can make great savings. Complete the budget and determine how much you can keep each month to put towards repaying your home loan and investing.
Having said that, I do believe that having a home loan doesn’t mean you can’t have a life. If having a mortgage means that you have to cut every corner and live like a monk, you’re better off renting.
3. MAKE A SAVINGS PLAN
Once you have clarity of how much money is left over each month by preparing your budget, look are your expenses and see where you can get some savings without much effort.
I read recently that by doing some simple things and changing your habits, a couple can save on average $8,000 annually. Some simple strategies included taking left overs to work for lunch, using discount coupons, avoid using ATMs from other banks, etc.
Personally, I find there are big savings shopping in markets rather than supermarkets. Supermarkets operate in a virtual monopoly and can charge whatever they like. Moreover, it’s more interesting to shop in markets (Like Vic Market) and there are a fair few in any major city.
Once you have a made some savings according to the plan, park all the savings in your redraw where you don’t have easy access and be tempted to spend it.
4. RESOLVE TO PAY EXTRA INTO YOUR HOME LOAN
Did you know that, just by turning your monthly home loan repayment into fortnightly (i.e. divide your monthly repayment by 2 and pay fortnightly) you can shorten your loan term by more than 5 years?
For an average loan of $500,000 at 7% (Average interest rate over the life of a home loan), if you pay the minimum monthly required of you, the total interest over the total loan term will cost you $698,542. You would have paid the bank a total of $1,198,542 over the 30 years.The interest component is more than the principal amount that you have borrowed.
However, if you decide to divide your minimum monthly repayment by 2 and pay that fortnightly, you would reduce your loan term to 23 years and 9 months, saving yourself a whopping $171,112 in interest. This is not magic but, you are making an extra month of repayment in the year because 26 fortnightly repayments is equal to 13 monthly repayments for the year.
It’s a simple strategy and you probably won’t even feel that you’re paying extra into your home loan. Now imagine that you are able to make that $8,000 savings on your monthly expenses and you will put that towards your home loan. That means increasing your fortnightly repayments by, say, $300. That would reduce your loan term to 16 years 7 months; saving you about $352,000 in interest compared to if you were paying the monthly minimum.
All of this can be achieved without having to earn any extra income or give up any leisure time. All that is required is changing some shopping habits and taking a hard look at your spending pattern. Are we motivated yet? I know what I can do with a $352,000 saving!
5. SET A REALISTIC GOAL
After preparing your budget and knowing how much you have left over for the month, work out how soon you want to pay off your mortgage. Then jump on the Mortgage Choice website and work out the fortnightly repayment required to pay off your home loan for the loan term you are aiming for. e.g. If you have a loan balance of $500,000 and want to pay it off over the next 10 years, most loan calculators will help you to calculate the fortnightly repayments needed to achieve your goal or call your broker. Be mindful to be realistic about what you can afford and not to leave yourself short to cover lifestyle expenses and emergencies. While it is a good practice to pay extra into your home loan, you do not want to frequently dip into your redraw availability especially if your bank has a redraw fee. A way around this is to have a fee free unlimited redraw facility in your home loan. Here, you can park every single spare dollar and redraw it when needed and every dollar of your savings is working hard against your home loan.
That's all folks! I know I said top 10 tips... Too much of a good thing is no good for the constituition. Tune in next week for the next installment for the next 5 tips... Take care! For those who can't wait till next week, call 0413 871 888 to discuss your home loan and ways to make some savings.