Fast Track To Freedom
Newcastle Herald
Monday March 15, 2004
YOUR mortgage will most likely be the biggest debt you incur during your life, and while a standard home loan term can be as many as 25 years, obviously the goal is to pay it off as quickly as possible.
If you are an owner-occupier, your mortgage is known as an undeductable debt.
This means you don't receive any tax concessions for it.
A good strategy for building wealth is to pay off this undeductable debt as quickly as possible so the money that goes towards it can then be used to invest in other assets perhaps in ones that are granted tax concessions.
While it might seem that paying your loan off quickly is easier said than done there are strategies you can adopt which, over time, can save you thousands by cutting down on the time it takes to clear your mortgage.
Remember, paying the minimum monthly repayments means you're paying the maximum interest possible.
Refinancing your loan to a product with a lower interest rate is one practical option.
Keep an eye on interest rates and do your homework.
If you find a product with a lower rate that includes the same features, benefits and service, then it may be worthwhile to make the switch.
If you have a great relationship with your current lender though, don't sacrifice this for the small saving.
The relationship you may have built over the years should be worth more than 0.1 or 0.2 of a per cent.
If you do refinance, try and keep your repayments at the same level you were paying previously.
This is an easy first step to earlier repayment.
But don't make a habit of switching between lenders every time you spot a lower rate.
It is a distracting tactic and may end up costing you money.
To pay off your home loan faster an important loan feature is the ability to make extra repayments without incurring a fee.
A redraw facility is good because when you have a home loan it means you don't really need an additional savings account.
General savings accounts offer little or no interest and could in fact be costing you money so close them and pay the money off your loan instead.
If you use your savings to reduce your mortgage, you're effectively earning the equivalent of the home loan rate tax-free.
Redraw also allows you access to your extra savings if you need them but check that the redraw facility is flexible.
Some carry high fees and others only allow you to redraw set amounts of money at a time.
Another option is an offset account, which is a savings account linked to your home loan.
While your savings are separate from your home loan, they are not earning any interest.
Instead the interest is being used to reduce your mortgage.
Check that the account is a 100per cent offset account which means you get the full mortgage interest rate on your savings as some lenders pay a lower level of interest.
Getting your salary paid into your mortgage account rather than a savings or cheque account can also work like an offset account.
From the minute you credit your mortgage account with your salary, you'll be saving interest and reducing the time it takes to pay off your loan.
Because interest is calculated daily this can shave years off the loan term and save thousands of dollars.
Some lenders will even give you a separate line of credit account, which is like an overdraft.
Be warned though, some of these loans have a high level of flexibility that might let you increase your debt too easily so this requires a lot of discipline.
Another strategy to help pay off your loan more quickly is to understand your expenses.
Draw up a budget to highlight where your money goes. This might help identify extra money that could be redirected into additional mortgage repayments.
Without doubt the cheapest loan is the one you pay off the quickest. The best way to do this is to increase your repayments and frequency of your repayments.
It will save you money and reduce the amount of time taken to pay off the loan.
Make sure you choose a lender that allows you to make additional payments and lump sum amounts.
Try to pay fortnightly or weekly instead of monthly.
You can potentially slash more than 1per cent off the true cost of your mortgage just by splitting your monthly payments into four weekly ones instead.
That's because you're making 52 weeks' worth of payments instead of 48 that is 12 times four weeks.
For example, by splitting your monthly instalment into four and paying weekly and paying just an extra $20 a week you can save almost $47,000 in interest and almost five years off your term.
There are many ways you can actively save money rather than just relying on your property's natural capital gain.
The coming year is unlikely to see the same levels of growth experienced over the last couple of years so make the most of your hard-earned cash.
But remember to enjoy life, so don't deny yourself the treats along the way.
Make paying off your mortgage just part, albeit a very important part, of your overall financial strategy.
Aim for balance.
This is the fifth article in a six-part series on home purchase by Lisa Montgomery, the head of consumer information and advocacy for Wizard Home Loans.
© 2004 Newcastle Herald