Five tips to reducing your debt and paying off your home sooner
Home ownership is the dream of every Australian and most invest in a mortgage to make this dream a reality. A mortgage is one of the biggest decisions you may make in life and a debt that we all wish to pay off as soon as we can. So what can you do to reduce your debt and pay off your home faster? The tip most people will give you is to make additional repayments however the majority of people are already paying the maximum amount they can afford. So what is the real trick to reducing the length of your mortgage? Here are five of our top hints.
- Split your Loan
You can get the best of both worlds when you split into two different products because you can take advantage of the security of a fixed rate home loan as well as the benefits of a variable loan. Fixing your home loan in one spilt ensures that you are protected against the rise of interest rates and a variable portion means you are less vulnerable if interest falls and allows you to make additional payments on that percentage of your loan. Ultimately, whichever way the market goes, you can ensure that you will be safe in one split and can be well on your way to reducing your loan term!
- Make Fortnightly Repayments
Most mortgages come with monthly or fortnightly repayment options and if you are wanting to reduce your loan term, fortnightly is certainly the right choice for you! Assuming your monthly repayments are $1,000, after a year you would have paid $12,000 (12 x $1,000). A fortnightly payment would split this in half, making a payment of $500 ($1,000 divided by 2).
Because there are 26 fortnights in a year you will pay $13,000 (26 x $500). This is $1,000 more than if you were making repayments on a monthly basis so you are essentially making 13 monthly repayments in 12 months! This extra amount comes off your loan principal and reduces the amount on which future interest is calculated. This strategy can cut off on average of 5 years of your loan term.
- Take advantage of an Off-set Account
Every dollar you leave in your offset savings account reduces the amount of interest you pay on your mortgage, so if your home loan has the capacity to link a 100% offset account be sure to take advantage of this. For example, if your mortgage is $200,000 and you have $10,000 in your offset account you will only be paying interest on $190,000 as opposed to the full amount. Any opportunity you have to reduce the amount of interest charged helps you to own your own home sooner.
- Stay informed
It’s easy to sign up for a mortgage, make the repayments as they fall due and think about it as little as possible – if the repayments are being made, there’s not much else to think about right? Wrong! This attitude can be the difference in paying your mortgage of years ahead of time. Stay informed with what is happening – rate changes, new products and changes in the market itself may allow you the opportunity to negotiate a better deal and get yourself ahead of the game.
- Pay Lump Sums Twice a Year
A lump sum repayment is a term to describe a once off deposit to your mortgage or debt on top of your usual repayments. Lump sums are very beneficial for two reasons; they lead to more money taken off your mortgage which in turn means less interest charged and paying off your home sooner. We all know that it is difficult to find extra cash to pay towards our mortgage however even just making two lump sum payments a year can make a huge difference. Consider depositing your tax return straight into your mortgage or selling off assets you no longer use, like that boat or Jet Ski collecting dust in your garage. Payments don’t have to be thousands of dollars, even just paying an extra $200 can make a big difference in the long run. Remember – every bit counts to reducing your interest paid and will get you on the way to being a homeowner sooner than expected!