Paying your mortgage off ahead of the typical 30 years offered by lenders takes commitment and focus.
Before you look at extra ways of saving money to use on paying your mortgage, here are some finance hacks that will help set you up to achieve your home-ownership goals.
Get the best home loan deal
The basic premise for success is that the smaller the debt, the lower the interest rate and the shorter the term, the sooner you will pay off your home loan. It all begins with ensuring you have the best deal on your mortgage.
Two ways you can do this are to:
- Negotiate a lower interest rate: When was the last time you rang your lender and asked for a better deal on your home loan? Wait, you can do that? Yes, you most certainly can! I did recently and immediately got 80 basis points (0.8 per cent) off the variable rate.
- Consider switching lenders: If your lender isn’t providing you with a competitive interest rate and isn’t willing to budge, you have the option to switch lenders. At the time of writing, lenders are offering competitive rates – they’re hungry for your business.
Optimise your credit score
Whether you’re negotiating with your current lender or thinking about switching, one of the best ways to get an optimal interest rate is to be someone a lender wants.
When you apply for a job, you ensure your CV and LinkedIn profile look good. Similarly, you also need to spend time making sure you look mortgage-worthy. The best deals are available to borrowers with good credit ratings.
Want to know what your credit score is? You can run one online. I used the tool on the Canstar website to run a check on myself. The good news is, wherever you are on the scale, you can improve your score.
Figure out whether fixing your mortgage is right for you
One of the most significant decisions you will need to make as a home owner is whether to fix the interest rate on your mortgage.
Are you the sort of person who hates numbers and turns the TV off when the finance report comes on? Do you ever stop to listen to what the Reserve Bank says about interest rates?
Once you are a home owner with a mortgage, if you do nothing else, make sure you stay informed about the general state of the domestic and international economy and how that might affect interest rates.
Having a fixed interest rate on your home loan means that the rate at which interest is charged remains the same for a certain period of time, usually from one to five years. That means that whether the variable interest rate at your lender goes up or down, you will still be charged the same rate of interest on that loan.
Pay your mortgage fortnightly
One of the easiest ways to get ahead on your mortgage is to pay fortnightly. Yes, fortnightly.
The monthly repayment on a $600,000 loan at 6 per cent per annum over a 30-year term is $3597. However, if you pay half of that ($1798.50) each fortnight, your loan will be paid off in 24 years and seven months – more than five years ahead of schedule. Plus, you’ll save $148,342 in interest.
How does it work? Though there are 12 months in a year, there are 26 fortnights. So, if you pay half the monthly repayments fortnightly, you’ll end up making an additional month’s worth of mortgage payments a year, and that adds up over the life of your loan.
Use an offset account
When you apply for your home loan, you’ll probably hear about whizz-bang features such as offset accounts.
Offset accounts are like bank accounts, except they’re attached to your mortgage. The general premise is that instead of earning interest on your savings – and paying tax on it – you get a reduction on the interest charges on your mortgage.
Using an offset account is convenient because, although it’s much like a standard bank account, moving money to and from your mortgage is easier, meaning it’s also simpler to make additional repayments.
If you plan to use an offset account, you may wish to close other savings accounts and instead use your offset for your day-to-day banking. The idea is that ensuring your pay or other income goes into this account allows you to maximise interest savings.