24
Ways to Get the Mortgage Monkey off Your Back Years Sooner Than You
Thought Possible
The one thing almost all borrowers have in common is that they don't
want to be borrowers. They want to have their loan paid off and to
be debt free. If you've just borrowed (or if you're just about to
borrow), the day when you get the title deed on your property back
from your lender may seem a very long way away. Let's face it - it
probably will be a long way away.
But don't despair. You can take steps to pay your loan off
faster and save a heap of money. Here are a few ideas that will help
you along the way.
1. Skip the Honeymoon
Introductory or honeymoon rates have long been an important marketing
tool for lenders. The idea is to offer you a cheap rate to get you
in the door and then try to keep you there at a higher rate for as
long as possible (which allows them to make money on the deal).
But beware of lenders bearing gifts. Most lenders roll your loan over
the their standard variable rate when the honeymoon is over. They
also can hit you with fairly steep exit penalties if you want to re-finance
before you have been on their standard variable rate for two or three
years. And the problem is that the variable rate is often higher than
some of the lower basic loans available.
2. Pay at an Expensive Rate
While rates are low, why not get in ahead of them. Get a variable
loan with the lowest rate you can find (or, better still, a fixed
loan that allows you to make extra repayments), and make your repayments
as if rates are what they were a couple of years ago. If you have
a loan at seven percent and you are paying it off at 10.5% you won't
even notice if rates go up. And you'll be paying off your loan quicker
and saving yourself a packet.
3. Pay it off Quickly
Time is money. There are all sorts of strategies for paying less interest
on your loan, but most of them boil down to one thing. Pay your loan
off as fast as you can. Consider the following example of a loan of
$100 000 at 7%:
If you pay out the loan over a term of 25 years your monthly repayment
will be about $707. This equates to a total repayment of $212 100
over the term of your loan.
If you pay the loan out over 10 years rather than 25 your monthly
payment will be $1,161 a month (ouch!). But the total amount you will
repay over the term of the $100,000 - a saving of a whopping $72,780!
4. Repay More Often
The simple things in life are often the best. One of the simplest
and best strategies for reducing the term and cost of your loan (and
thus your exposure should interest rates rise) is to pay fortnightly
rather than monthly. How could this make a difference I hear you ask?
It works like this:
Split your monthly payment in two and pay every fortnight. You'll
hardly feel the difference in terms of your disposable income, but
it could make thousands of dollars and years difference over the term
of your loan. The reason for this is that there are 26 fortnights
in a year, but only 12 months. Paying fortnightly means that you will
be effectively making 13 monthly payments every year. And this can
make a big difference.
5. Hit the Principle Early
Over the first few years of your mortgage, it may seem that you are
only paying interest and the principle isn't reducing at all. Unfortunately,
you're probably right. Early in your loan, most of your repayments
go to paying interest. So try anything to get some of the principal
repaid early, you'll notice the difference.
6. Get a Package
Speak to your lender about what financial packages they have on offer.
Some offer discounted home insurance, some offer fee-free credit cards,
some offer a free consultation with a financial adviser or a fee-free
transaction account. While these things may seem small beer compared
to what you are paying on your home loan, every little bit counts
and sometimes you can use little savings on other financial services
and turn them into big savings on your home loan.
7. Consolidate
One of the best ways of ensuring you can continue to pay off your
loan quickly is to protect yourself against interest rate rises. And
if your home loan rate starts to rise, you can be absolutely positive
of one thing - that your personal loan rate will rise and so will
your credit card rate and any hire purchase rate you may happen to
have. Another thing you can be almost certain of is that the rate
you are paying on your credit card and personal loan will be higher
than your home loan. Many lenders will allow you to consolidate all
of your debt under the umbrella of your home loan. This means that
instead of paying 14 or 15 percent on your credit card, you can transfer
this debt to your home loan and pay about half that rate.
8. Split Your Loan
A split loan, or combination loan as they are often known, allows
you to take part of your loan as fixed and part as variable. Essentially
this allows you to hedge your bets as to whether interest rates are
going to rise and by how much. If interest rates rise you will have
the security of knowing part of your loan is safely fixed and won't
move. But if interest rates don't go up (or if they rise only slightly
or slowly) then you can use the flexibility of the variable portion
of your loan and pay that part off more quickly.
9. Make Your Mortgage Your Key Financial Product
Mortgage products (know as all-in-one loans or 100% offset loans)
allow you to use your mortgage as your key financial product. Having
a mortgage that you can pay all of your income into and draw on for
living expenses as you need to, using a credit card, EFTPOS or a cheque
book, can make a huge difference to the speed at which you pay off
your loan. Because your whole pay goes into your mortgage account
you are reducing the principal on which interest is charged. Sure,
you might take a couple of steps back as you withdraw living expenses
but careful use of this sort of product can get you thousands of dollars
ahead of where you'd be with a "plain vanilla, pay once a month" home
loan.
Keep in mind however that these types of loans often have a slightly
higher interest rate than other types of loan. Because of this they
are best suited to borrowers with relatively high incomes. If you
are only able to make the equivalent of the minimum repayment on your
loan (and not put in any extra) you may be better off with a cheaper
standard variable or basic variable loan.
10. Use Your Equity
If you have already paid off some of your home, you are said to have
equity. Equity is the difference between the current value of the
property and the amount you owe the lender. If you are careful, you
can use this equity to your advantage and help to pay off your home
loan sooner. Many lenders will allow you to borrow using your equity
as collateral. Using an equity loan to improve your property could
be a good way to ensure that your home increases in value.
11. Switch to a Lender with a Lower Rate
It may sound like a simple statement but switching out of your current
loan and taking out a loan at a lower rate can mean the difference
of years and thousand of dollars. If you have a loan that is tricked
up with all the features, or even if you have a standard variable
loan, you might find that you could get a no frills rate that is as
much as a percentage point cheaper than your current loan.
12. Forgo Those Minor Luxuries
This is the bit you don't want to read. Once you have a mortgage,
your life is likely to be luxury-free (or at least pretty close to
it). Think of all the weight you will lose by giving up your favourite
indulgent snack. For the sake of your health you should quit smoking
and drink less anyway. All the money you save should go to reducing
your principal and saving you money in the long run.
13. Stay Informed - Don't Forget About Your Mortgage
The temptation is always to let your mortgage roll along, make your
repayments as they fall due and think as little about it as possible.
This can be a big mistake. Keep yourself up to date with what's happening
in the marketplace. You might find that there's an opportunity to
put yourself well ahead of the game.
14. Get a Cheap Rate and Invest the Difference
When interest rates are low, it is usually safe to say that inflation
is also slow. Thus, bricks and mortar may not be the best place to
invest. Try getting the cheapest home loan you can find and paying
the minimum repayment. Use any extra cash to invest in other areas.
You may find that the return you get on shares or some other type
of investment means that you have created a nice little nest egg,
which you can use to pay off a bigger chunk of your home loan than
you might otherwise have been able to do. But beware - high returns
often mean high risks. Before undertaking any investment, invest in
a consultation with a qualified financial adviser.
15. Run an Offset Account
Instead of earning interest, any money you have in your offset account
works to offset the interest you are paying on your home loan. For
example if you have a loan of $100,000 at 7% and an offset account
with $5,000 in it earning 3%. This means that $95,000 of your loan
is accruing interest at 7% but the rest is accruing interest at 4%
(7% on your loan less the 3% the $5,000 in your offset account is
earning). Of course, the best sort of offset account pays the same
rate as your loan.
16. Pay All Your Mortgage Fees and Charges Up Front
Some lenders allow you to add to the amount you borrow instead of
coming up with cash for your upfront costs. While this can seem a
blessing try to avoid doing this. Consider the following example:
Borrower A borrows $100,000 over 25 years at 7%. He upfront costs
are $1,000 but she has enough cash to make sure she can cover these.
Her monthly repayment is $707.
Borrower B takes out the same loan but doesn't have enough cash to
cover the upfront costs. So he borrows $101,000, at the same rate.
His monthly repayment is $714. While $7 per month may not sound like
much, it means that over the course of the loan, Borrower B will pay
$1,100 more interest that Borrower A.
17. Pay Your First Instalment Before It's Due
With most new loans, the first instalment may not become due for a
month after settlement. If you can manage it (and your lender will
let you), pay the first instalment on the settlement date. If you
do this, you will be one step ahead of the lender for the term of
your loan.
18. Shop Around and Make Sure Your Bank Knows It
One of the most powerful tools you can have in the search for the
best home loan is information. Make sure you have rung half a dozen
lenders before you start talking to your bank about getting a new
loan or re-financing your existing loan. Make sure you know what rates
and features are offered by each of them on comparable products. Be
ready to tell the bank what you are looking for and don't be afraid
to…
19. Make Sure Your Loan is Portable
If there is any chance that you will move house during the course
of your loan (and let's face it, there is a strong chance), make sure
that your lender will allow you to transfer your loan to a new property
and that it won't charge you the earth for the privilege. If you have
to get out of your old loan and into a new one if you sell up and
buy a new house, you could find yourself down thousands in discharge
costs on your old loan and establishment fees on your new one.
20. Avoid Bridging Finance
Someone once said bridging finance is so called because it allows
you to "pylon" the debt. The joke's appalling, but so is bridging
finance. Unless you get your timing right you could find yourself
with two home loans at the same time - with the bridging finance element
costing you an extra couple of percent premium on the standard variable
rate. Consider using a deposit bond or selling before you buy.
21. Choose the Loan that Suits Your Needs
Choosing a loan is about knowing what you want. Make a list of all
the features that are important to you and give them an importance
ranking. Draw up a grid of potential home loans and give the ones,
which have the appropriate features, a score - one for important,
two for very important, three for indispensable. Use this technique
for ranking the loans on offer. Ditching the features you don't need
can save you up to 1% on the interest rate of your loan.
22. Don't Be Afraid of Smaller Lenders with Cheaper Rates
Since the advent of the mortgage managers over the past five or six
years we have heard a lot about these "non-traditional lenders" and
how they have forced interest rates down. Some borrowers worry about
what might happen if their lender gets into financial trouble. Keep
in mind that you've got their money - so don't worry too much. There
are some smaller lenders whose names might not be familiar but whose
rates might be enough to get in touch. Check out lenders like Collins
Securities and FAI Home Loans. They may not be household names but
they have very competitive rates.
23. Find Out if Your Profession Will Get You a Discount
Some lenders offer discounts to specific professional groups or members
of professional organisations. Ask your lender if your occupation
qualifies you for any discount. You might be pleasantly surprised.
24. Buy the Next Issue of YMM
Information is your greatest weapon against the mortgage monkey, which
has taken up (or is about to take up) residence on your back. By keeping
informed about what is going on in the home market, you might be able
to stay one step ahead of your lender. And if you are one step ahead
of your lender, you will know what has to be done to pay your loan
off faster.
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