October 09, 2015
For many of us, being a home owner is a big part of the great Australian dream and something we aspire to from around the time we get our first full time job. Sadly for the vast majority, an obvious necessity in realising this dream is the dreaded home loan and without which, we could be saving well into our 40’s or 50’s before we have enough to purchase a home outright! And even if we did decide saving the full amount was the way to go, current trends of property values increasing as they are would mean the savings goal posts are constantly moving out of reach. And so we arrive back to square one, the home loan.
So you’ve got the loan approved and you’re signing the loan documents! Speaking from experience on both sides of the desk, this is one of the most exciting and proud moments of your financial life. The bank stipulates the minimum monthly payment required, or in most cases allows you to select a fixed extra amount to be paid, and you say “…. I’ll just pay the minimum for now, and increase it down the track.” Your intentions are true, but does that moment ‘down the track’ ever arrive? Finance of any kind is most easily paid by direct debit, and direct debits are designed to be a ‘set and forget’ type of transaction. From my experience in the industry, there are four simple ways to pay your home loan down much quicker than the 30 year loan term with minimal effect on your current lifestyle;
1: Pay half the required monthly payment on a fortnightly basis, for example; if your minimum monthly was $1,500, then simply switch to paying $750 per fortnight. From pay day to pay day you’ll hardly notice a difference, but over the course of 12 months you’ll actually pay an extra months repayment off the principle of the loan, and at the same time reducing the overall interest paid. This technique alone can reduce the overall loan term by over 4 years on a 30 year loan.
2: Make use of the offset account if one is available. An offset account is a separate transaction account whereby any money in the account acts as if you’ve paid it off the home loan while still being available for day to day use. You can have your wage directed to the offset account, and still have card access for convenience. It’s important to note that not all loans will offer ‘offset’ and most will charge a monthly or annual fee for the privilege (You should take the associated costs into account to see if it’s worthwhile). Just how much you keep in the offset account will determine how much you reduce the overall loan term by, but for example; a $300,000 loan at a rate of 4.5%p.a. with $10,000 in the offset account ongoing would save you almost $27,000 in interest over 30 years.
3: Nominate an extra amount over and above the minimum repayment that you can afford to pay, and most likely won’t even miss. Even an extra $100 a fortnight will make a massive difference. On our previous example of a 30 year loan of $300,000 at 4.5%p.a., the extra $100 a fortnight equates to about $60,000 in interest saved over the loan term and reduces that term by over 6 years!
4: And lucky last, don’t fall into the trap of forgetting about your loan. Aside from taxes, it’s likely to be the most expensive bill you’ll ever pay and any opportunity to review it should be strongly considered. This step is almost the easiest of the 4 because all it requires you to do is contact you mortgage broker and set them the task of doing the research on your behalf. Let the professionals do all the shopping around while you get on with your day. The best case scenario would be that they can get you a much cheaper rate, saving you big time…. And the worst case? You discover you’re already getting a great deal and there’s no need to change anything.
For more information or a free review of your mortgage, call myself on 0438 626 885 or email firstname.lastname@example.org Dane Heinrich, Franchise Owner and Mortgage Broker, Mortgage Choice Sale.