Simple tricks to cut the mortgage bill
The effect of compounding works for debt repayment as well as investment, writes Susan Edmunds.
Don’t take cheaper options
It’s probably the biggest debt you will ever have, and the repayments one of your most significant expenses each month.
But many people pay much more than they need to over the life of their home loans. Here are some simple tricks to save huge amounts of money.
Make bigger repayments
Potential saving: $100,000
It might sound obvious, but many people make smaller repayments than they can afford.
It’s common to accept whatever repayment the bank suggests, to pay back a loan in 20 or 30 years.
Financial coach Shula Newland said even a small amount extra could make a big difference because of the effect of compounding interest.
‘‘A $300,000 mortgage at 4.5 per cent [interest] will have minimum payments of around $350 a week for a 30-year mortgage and you will pay around $250,000 in interest. Increase your payment to $400 a week and you will pay it off seven years earlier and save $65,000 in interest,’’ she said.
‘‘Increase it by $100 a week to $450 and you will pay it off 10 years earlier and save $100,000.
‘‘A hundred dollars a week is equivalent to a bought lunch and coffee each day, and voila, you now may be able to retire 10 years earlier,’’ Newland said.
Kate Henderson, a financial mentor service adviser at the National Building Financial Capability Charitable Trust, suggested putting together a spending plan to cut back on unnecessary spending. That would allow borrowers to divert as much as was comfortable to their mortgage payments.
‘‘But make sure you have an emergency fund.’’
Round up your payment
Potential saving: $10,000 or more.
Even if there is little room in the budget for a bigger payment, you may be able to save money by ‘‘rounding up’’.
If your payment is meant to be $1269 a fortnight and you round that up to $1300 you will save $12,517 in interest, on a rate of 5.5 per cent.
David Boyle, group manager of investor capability at the Commission for Financial Capability, said small increases made a difference because mortgages were for such long terms.
‘‘Even an extra $10 a fortnight or a week could have quite a big impact on a very long-term debt like a mortgage. Cut back on the odd latte or two.’’ Potential saving: $30,000
If you move on to a lower interest rate, don’t let the bank adjust your repayment down. Keep paying the same rate.
If you have a $400,000 loan and your interest rate drops from 5.9 per cent to 4.9 per cent, your fortnightly minimum repayment will drop by about $100, on a 20-year loan.
But if you keep it at the rate you were already paying, you’ll pay the loan off two years early and save about $30,000 in interest.
Pay fortnightly
Potential saving: $54,000
There might be 12 months in a year but there are 26 fortnights – use that to your advantage. Divide your monthly payment in half and pay that each fortnight. This will give you two extra payments a year.
On a $400,000 mortgage at 4.9 per cent, you’ll save about $54,000 in interest and be mortgage-free four years earlier.
Structure your loan properly
Potential saving: Up to $80,000 Talk to your bank or a mortgage adviser about whether you have your loan set up in the best way possible.
Many people fix the whole thing for a set term but this means they cannot easily make extra payments.
You could consider a revolving credit facility. This sets up a portion floating, which then acts a bit like a huge overdraft.
When your income is credited to your account, it sits in that account, offsetting the interest you’d otherwise pay for the month.
Then, at the end of the month, you pay off your credit card and other bills from the account. This
‘‘Even an extra $10 a fortnight or a week could have quite a big impact.’’
David Boyle, Commission for Financial Capability
requires discipline and it can sometimes be hard to see how you’re tracking.
But done well, it can save you money. Mortgage brokers Squirrel estimate that, done properly, it can reduce a mortgage term by five to 10 years and save up to $80,000 in interest.
Another option is an offset savings account. Some banks offer the option of giving up interest on your savings in return for paying less on your home loan.
Financial coach Hannah McQueen said the right structure should allow borrowers to repay it as fast as possible, at the lowest cost, while having maximum flexibility.
‘‘The most common areas people fritter money is on their mortgage structure and taxes, so you should get an independent assessment of how you can improve this before you focus on cutting back spending.
‘‘That gives you the framework, now you need to attack the mortgage. ’’