I see many people actually go through ‘finance fatigue’ at this stage, and with all the paperwork and deadlines it can be overwhelming, so I understand wanting to park the bank statements. However, with a little diligence both when you first set up your loan and once it is established, you could pay the mortgage off sooner and remove the need to ever get another statement sooner than you expected.
So let me share some tips that might help you pay off that mortgage sooner.
This is one method worth considering that might help reduce your mortgage payments sooner. This could be achieved even by choosing fortnightly instead of monthly repayments. I personally am not convinced this is going to be a total game changer. Making one more repayment a year is not going to have you retiring a whole lot sooner.
It is a start but there are more powerful steps you can take, and depending on your lender you may even find they take the annual repayment and divide by 26, so technically you may not be even paying off more – so check out how your lender does this.
2. Use an offset account
An offset account is essentially a savings account linked to your loan. There are many possible benefits of this structure but when it comes to protecting yourself, creating a buffer and repaying your home loan quicker, I can’t stress how effective this tool can be. Imagine this – you have a loan of $300,000 and $50,000 in savings in an offset account.
Now, controversial as this might be, if you had an interest-only loan against your property and you are paying 5%pa in interest then you would ‘only’ pay 5% interest on $250,000 so your repayment each month would be $208 less than a repayment on your $300,000 loan with the savings in a traditional saving account. Next month your offset would be $50,208 and you would pay interest on $249,792 and so on and so forth, it has a cumulative effect.
This could seem small but if you had that $50,000 in a traditional savings account you would be earning about 3% pa and pay tax on that. So with an offset, you are essentially saving more. Now using an offset for a home loan is one of the things APRA has addressed as a significant concern. They want to make sure we are paying off our home loans and moving to a position of being debt-free by the time we retire – and rightly so.
I would suggest using an offset wisely, and think about putting every spare dollar into the offset to allow you to save interest, increase your savings and provide a buffer. Most importantly, at some point, when your offset account equals your loan amount, you then could have the ability to pay it all off at that time. Offset accounts can now also be used with principal and interest loans, they just work a little differently.
Using this technique and some of the other tips below you can see how the offset savings account balance could add up quickly.
3. Advanced offset strategy
I mentioned earlier there are many benefits to offset accounts. This is an advanced strategy but one I have used for many clients who are worried about interest rate increases. There are very few lenders who allow you to do this, but it is well worth exploring. Traditionally offset accounts cannot be used with a fixed loan, however, there are exceptions.
Many people consider splitting their loan, for instance, to half fixed and half variable. This means if rates do go up they can sleep at night knowing some of the loan is fixed. Warning, this is the advanced strategy. When you take out a split loan with a lender that allows an offset against a fixed loan, when the variable loan interest rate goes up, you move your offset against that loan and if the fixed rate becomes the higher interest rate as variable rates go down, you can move your offset against the fixed rate.
So, you get the benefit of splitting your loan and fixing some of the loan and utilising an offset. This can be magic for some people.
“Many mortgage brokers don’t even know this technique so I am revealing some of my closely held secrets.” – Jane Slack-Smith
4. Keep your payments constant
When you set up your home loan there is a choice you can make with a simple tick of a box. You can choose if you would like to set your repayment amount (such as $1,500 per month) or tick a box that says just deduct the minimum repayment. If you choose the latter you will see as interest rates go down so will your repayments.
If you chose a set amount then as interest rates go down the repayment you make every month stays the same. This means you start building up funds in your redraw and this could help you get ahead on your repayments. You could take those funds in redraw at any time and use it to reduce your loan. This is not something I would personally suggest – I think keeping some funds as a buffer would be a good idea – but reducing your loan amount will get you to a point where you can repay your loan off sooner, especially if you keep those high monthly (or fortnightly ) repayments going.
5. Give up on the luxuries
Delayed gratification in today’s society seems to be rare. However, if you can sacrifice a little now, you could get to enjoy all the luxuries you have put off in the long run. I know in my early 30s when my friends were off on overseas holidays, I was saving and buying properties, renovating and living in dusty conditions (often for months without a kitchen or even bathroom). However, ten years later it all paid off.
Once again, I am going to suggest you use an offset (yes there is a theme here), as it can help you quickly repay your loan when you choose to. With every luxury you delay, put those savings into your offset or redraw. Don’t be one of those people who drives all over town for the cheapest petrol just to spend your ‘savings’ on a Mars bar at the service desk.
If you make a saving, bank it! The more you bank, the less interest you pay, so the more you can bank. Some people even take this a step further and put their month’s expenditure on their credit card so all their pay is in the offset for as long as possible (as interest is calculated daily) but ensure they pay it off at the end of the month.
About Jane Slack-Smith
Jane Slack-Smith is the Director of Investors Choice Mortgages, host of Your Property Success Podcast and Founder of Your Property Success – online education teaching homeowners and investors to about property. She recently released a book titled ‘Your Property Success with Renovation: 2 properties, 1 renovation $1million in the bank’ and has been awarded Australian Mortgage Broker of the Year numerous times.