Buying property in Australia and taking out a mortgage with the aid of a mortgage broker is a pivotal point in anyone’s life and it will have a huge bearing on your financial wellbeing. Because of this, you need to know how to structure and manage your mortgage debt to the best of your ability.
We may be in a low-rate environment at the moment, especially with a cash rate of 1.5%, but many market analysts are predicting that interest rates will take a turn later this year. In fact, 68% of experts and economists from the finder.com.au RBA survey think that the next cash rate move will be up, however, these experts don’t think a rate rise will happen until July this year.
Lately, we’ve also seen a trend of out-of-cycle rate movements with several banks lifting mortgage rates independently of the RBA. As this is likely to continue, it’s important for mortgage holders to service their debt more efficiently.
Making overpayments, negotiating a lower interest rate and making the most of money-saving features are just some ways you can be smart about paying down your mortgage faster.
Go the extra mile
Like anything in life, you should never do the bare minimum if you have capacity to do more. The same goes for your mortgage. While your bank will say you’re only required to make the minimum repayment, consider making extra repayments above and beyond this to get ahead on your debt.
By making regular overpayments on your mortgage, you can reduce your interest payable. For example, on a $300,000 mortgage at 5.12% interest over 30 years, making additional monthly repayments of $250 starting from your fifth year could save you $55,571.35 in interest. Plus, you would reduce your term by five years and nine months.
Of course, you can also make extra repayments on your home loan by making more frequent repayments. For example, if you opt for fortnightly instead of monthly repayments, you will end up making an additional repayment each year and therefore repay your debt sooner.
Negotiate for a lower interest rate
Many of us fall into a “set and forget” mentality when it comes to our mortgage interest rates, but this type of complacency will only cost you money. If you don’t think you’re getting a good interest rate, approach your lender and see if they can offer you a better deal. If you have a good repayment history, you’ve been a loyal customer for several years, or if you have other products with the bank such as a credit card or insurance, it’s likely they’ll be happy to offer you a better rate.
Remember, it would cost them more to lose you as a customer than it would to lower your rate.
Refinance to a new bank
consultationIf you don’t think you’re getting a competitive interest rate on your loan (and your current lender isn’t willing to grant you a better rate), or if your current loan doesn’t come with valuable features such as the ability to make extra repayments, a redraw facility or an offset account, then it may be time to switch to a new lender.
Sourcing a lower interest rate or being able to use an offset account could potentially save you thousands of dollars over the life of your loan. Compare products side-by-side and consider the rates and features of each product, but also pay attention to any product fees that come with the loan, such as establishment fees or account-keeping fees.
Use an offset account
Similar to a transaction account, a linked offset account can minimise the interest payable on your mortgage by the amount held in the account.
For example, a $300,000 mortgage with a 100% offset account with $50,000 in it would mean interest is calculated on a balance of $250,000 instead of $300,000. Assuming the above details, if you had $5,000 in an offset account and you started the offset five years in, you could save $12,563.41 in interest and you would shrink your loan term by eight months.
Your mortgage is likely to be the biggest financial commitment you make in your lifetime, so it’s worth looking into ways to save money and pay it off sooner. Whether it’s making additional repayments, haggling for a better rate or leveraging useful product features, there are many ways you can structure your home loan to free yourself from debt sooner.
- Practical ways to free yourself from mortgage debt faster - June 9, 2017