Borrowers are costing themselves money by failing to invest a bit of time in better managing their mortgage, experts say.
Keryn Batsilas, the Melbourne-based strategic financial adviser for the Wealth Enhancers business, said people can pay off their home faster by managing their finances in different and more efficient ways.
“I definitely think that people can make a difference to their mortgage,” she said.
“Unfortunately some people look at this big number, feel a bit daunted and just think ‘we’ll get to it eventually’, but they just don’t do it.”
The good news is, Ms Batsilas says paying off a mortgage faster does not mean a life of spartan misery.
“It doesn’t mean you have to be one of those people who never goes out. No-one wants to be that person,” she said. “It just means working to a budget.”
Here are some of the top strategies for getting your loan to manageable levels faster.
Review your mortgage and be prepared to change lenders
Ms Batsilas recommends reviewing your mortgage every two to three years, despite the paperwork. Switching from one loan to another can mean saving years and thousands of dollars.
Some loans come with special features which might be great for some people but are completely unnecessary for others. Money can be saved by choosing one with the bare basics.
Financial planner and accountant for BFG financial services Broderick Knowles agrees.
“It is not always about the lowest interest rate, it is about what suits individual circumstances,” he said.
Check the cost of changing, as there may be exit and establishment fees and stamp duty to pay.
ASIC recommends asking lenders for a fact sheet in order to compare loans. Mr Knowles said the nature of mortgages would change during the years it took to pay off a loan so it was important to remain informed.
Make additional repayments
Push yourself to pay more than the minimum. By putting extra repayments on your mortgage, you can bring down the total interest payments you make on the loan and the time it takes to pay it off.
One way to do this is to make repayments as though you were on a higher interest rate. Ms Batsilas notes lenders always calculate a borrower’s loan suitability based on their ability to pay a higher interest rate in any case.
Get a financial package
Some lenders provide a range of financial packages to go with a home loan. Examples are discounted home insurance, fee-free credit cards, free financial advice, or fee-free transaction accounts.
These might seem small fry compared with mortgage payments, but every saving comes in handy. In some cases there are also ‘professional’ packages for particular jobs.
A quick glance at major bank websites shows Australian banks offering home loans bundled up with discounted bank accounts and credit cards.
“A good financial package can definitely be an asset in paying off your home loan, as all the small things add up to make a difference over time,” Ms Batsilas said.
“You always have to read the fine print and work out if the home loan product becomes more expensive with the discount package, sometimes the additional cost can outweigh benefits.
“If you don’t already have a credit card they can be more of a trap than a help.”
Mr Knowles said packages sometimes have benefits you simply avoid.
“Credit cards are a good example of this and in some cases no matter how low the interest rate is on a credit card, you simply should not have it.”
Run an offset account
An ‘offset account’ is a transaction account linked with a home loan. The credit balance of a transaction account is offset daily against the outstanding loan balance, thus reducing payable interest.
On its website, ANZ Bank uses the example of a customer with a $150,000 home loan over 30 years paying about $167,190 in interest.
If the customer had an offset account linked with the home loan for the entire loan term with a constant balance of $10,000, they would pay the loan off in 26 years and four months and pay about $127,553 in interest – a saving of three years and eight months and more than $38,000.
Ms Batsilas said such accounts can be used even if you are saving for other things like holidays. “You can have it all in the same account or if your lender allows it, separate offset accounts for separate goals,” she said.
More frequent payments
By splitting monthly payments in two and paying each fortnight, you will be making the equivalent of 13 monthly payments in a year (there are 26 fortnights in a year).
There should be little impact upon one’s disposable income while also reducing the overall mortgage.
While more frequent payments can be valuable, Ms Batsilas notes they have little benefit if one is operating an offset account as the interest benefits are obtained from having money in the account.
“I think the best thing is to have an automated savings strategy which is better than hoping you’ll have some money spare at the end of the month,” she said.
Big sums on high-interest credit cards can hurt. Some lenders allow you to consolidate (re-finance) debt as part of your home loan, meaning instead of paying high rates on credit cards, you can transfer debts to your home loan on a much lower rate.
However, the ASIC/MoneySmart website warns that while consolidating can work, it may be only a short-term fix if one can’t meet the new loan repayments.
Get a cheap rate and invest the difference
Depending on the economy, there may be investment options other than property. By getting a cheap home loan and making the minimum repayment the extra cash can be invested in other areas.
The Your Mortgage publication says this can allow you to generate more money that can be directed into the mortgage in the future. However, be careful, as high returns can entail high risk.