For many of us, our home is the most valuable asset we will own. It's also likely to be the source of our largest liability - the mortgage you took out to buy it. Paying a mortgage can be a challenge at the best of times but there are simple tips you can employ to make it a little bit easier. And what better time to make a new resolution then the start of the new financial year.
Pay weekly or fortnightly
In my experience most homeowners are paid weekly or fortnightly but choose to make their home loan repayments monthly.
By halving your monthly home loan repayments and making them fortnightly instead, you will make the equivalent of thirteen months’ repayments in a single year rather than the required twelve. This additional month’s repayment will make a vast difference over the length and cost of your loan.
Fore example, a $400,000 loan with a 25-year term and a 5 per cent interest rate would require monthly repayments of $2,338, adding to $28,056 over the course of the year. By dividing that monthly repayment into two fortnightly repayments of $1,169, you will pay $30,394 over 12 months. These extra repayments will cut almost 4 years off the loan term, saving around $48,500 in overall loan interest charges. The best part about this strategy is that your household cash flow won't notice the extra repayment
Paying down your home loan with a tax refund
Much like aligning your mortgage repayments with your pay days, using tax refunds to pay off your mortgage can have a sizable impact on the length and cost of a loan. Make this an annual habit to become mortgage-free even sooner. IN the previous example, using a $1,000 tax refund to pay down your loan would save $2,920 in interest.
Set and stick to a budget
Creating a weekly budget at the commencement of the new financial year will help to identify where your cash is going and if there's any you can spare which can then be used to pay down your mortgage debt. While it’s hard for some, it's always a good idea to maintain emergency savings equivalent to around three months of living expenses. Don't be afraid to put this into your mortgage. Almost all variable rate home loans permit additional repayments to be withdrawn via redraw, so any surplus cash you can identify is not locked away if unexpected bills arise.
Don't pay a Complacency Tax
Record low interest rates and a competitive mortgage market are not reasons for home owners to assume you're on a good deal. You have the potential to get ahead financially by speaking with a mortgage broker to check if you are paying more than necessary on your home loan. It can be worth negotiating with a current lender or perhaps switching to a new loan to secure a lower rate.
Again, using the earlier example, if you were able to reduce your current interest rate by just 0.25 per cent would save $73,118 in interest costs and pay off their mortgage four years sooner. Banks and other providers of finance count on their customers not seeking better options. They refer to this as a Complaceny Tax.
Don’t be tempted by other, high-interest debt products.
Many people who experience ‘mortgage stress’ can actually be suffering from other types of high-interest debt. Mortgage stress is the inability to meet your monthly home loan payment son time but often results from people taking on too much high interest debt such as credit cards, store cards and personal loans. Home loan debt is rarely the problem.
It is important for anyone be cautious about taking on too much high interest debt and this is doubly so for homeowners with a mortgage. However, a home loan can be a useful tool for debt consolidation, potentially allowing you to achieve a significant reduction in the overall interest rates you are paying as well as lowering total monthly repayments and increasing your monthly cash flow. A debt consolidation should be structured properly and make good use of the new cash flow you have available.