Saving thousands: Blast your mortgage into oblivion

By Nila Sweeney
Now that you have your home loan, and are one of many "borrowers", you probably don't want to be a borrower forever! Presumably you don't want to live the rest of your live with such a large debt hanging over your head. If you are like most borrowers, you’ll want to have your loan paid off and be debt free as quickly as possible. 

If you’ve just borrowed or 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. And let’s face it, it probably will be.

But don’t despair. You can take steps to pay your loan off faster and save a heap of money in the process. Welcome to Your Mortgage Magazine’s guide to mortgage blasting.

Saving on interest payments
Paying off a mortgage early can literally save you thousands of dollars in interest repayments. The way it works is simple.  

Your minimum monthly mortgage repayment for a principal and interest loan is calculated on how much per month is needed to pay off the balance of the loan or principal over the loan term, plus the interest that has been accrued on that balance. 

Normal loan terms are around 25 years. You can, however, have lesser terms or longer terms if you desire. The shorter the loan term, the higher your minimum monthly repayment will be. Even if you think you can pay out your loan in 10 or 15 years, it’s a good idea to take the loan over a standard term of 25 years. This allows you a little more flexibility just in case things don’t go according to plan, and it also means that your minimum monthly loan repayment won’t be quite so high. It doesn’t mean that you will have to take the total time of the loan term to pay off your loan, (and in fact, hopefully using some of the tips in the article you won’t), but you have that long should you need it, and your minimum monthly repayments are manageable and affordable.  

Understanding Principal and Interest
If interest rates didn’t change, the dollar figure amount of your loan repayment wouldn’t change either. What would change, however, is the percentage or ratio of how much of the repayment is paying off principal, and how much of that repayment is servicing interest costs. When you begin paying back a mortgage, the majority of the loan repayment is servicing the interest, while the remainder of the repayment is paying off the principal.

As you pay more and more off the principal, the interest portion of the repayment will be less, which means that the principal portion will be more. Towards the end of the loan term, the majority of the repayment is principal, while the remaining portion of the repayment is servicing the interest.

Benefits of extra repayments
One of the main benefits of making extra repayments towards your home loan is that it takes less time to pay off a loan and you pay less in interest. What this means to you is that the more principal you can pay off by putting extra funds into the loan, the more of your repayment will go towards paying off the loan, rather than being dedicated to servicing the interest.

Let’s have a look at this a little more closely. Let’s say you took a principal and interest loan for a $150,000 over a term of 25 years, and your interest rate was 6.50 per cent. Let’s also say, for the purpose of this example, that your interest rate didn’t change for the term of the loan. 

If you had been paying only the minimum monthly payment and nothing extra, when you make your last repayment, or 300th monthly payment, not only will you have paid back $150,000 of principal, but also about $153,800 of interest as well. That is a very significant amount.

If you had paid the loan off in 20 years, you would have paid about $118,400 in interest. That is $35,400 you save in interest costs if you pay off your loan five years more quickly.

If you repaid the loan in 10 years, your interest repayments drop to about $54,000, which is a difference of nearly $100,000 compared to repaying the loan over 25 years. That’s $100,000 in your pocket!

So, plan wisely and try to repay as much as you can earlier. Later in this section, we’ll look at some ideas and loan products you can use to help repay your loan more quickly. 

Saving on interest repayments
Interest repayments on a $450,000 loan at 4.50 per cent per annum


 Loan Term (yr)  Interest repayments      Savings
 25  $300,375   - 
 20   $233,260  $67,115
 10         $109,647  $190,728


Organise a budget and have a plan!
If you don’t know where you are going, how do you know when you get there? It’s fine to throw a few extra dollars into your mortgage each month, but it is much easier to motivate yourself when you have some goals. You can do this in two ways.

The first option is to sit down and work out a budget for yourself. Work out what your total monthly after-tax income is, then subtract all your necessary expenses. Don’t forget to include your minimum monthly loan repayment. Factor in lifestyle expenses, such as entertainment and holidays as a monthly figure, and don’t forget to add in one-off annual expenses such as insurance, car registration, etc.

What you have left will be savings. You can then work out how much time and money you will save by paying off what you have left over on a regular basis. 

You can compile a budget for yourself, and calculate loan repayments etc, using our mortgage calculator tools. Just enter enter the loan amount, term and interest rate.

The second option is to work out the maximum time for which you want to be in debt. Let’s say you said 10 years is the longest you want to take to pay off your mortgage.

Make sure you get the right loan.
Getting the right loan the first time is a huge consideration when it comes to saving money. You need to make sure your loan is best suited to your circumstances. 

Most variable-rate loans will allow you to make extra repayments with no extra costs, and will not limit the amount or regularity of extra repayments you can make. 

This may not apply to fixed-rate loans or interest-only loans. Most lenders will limit the amount of extra repayments you can make without incurring extra fees over a specific period of time on fixed rate loans. This may be around $5,000 to $10,000 per year, so make sure if you want that flexibility in a fixed-rate loan, ask for it.

Not being able to make extra repayments may also apply during the ‘honeymoon’ period of a honeymoon or introductory-rate loan. Again, check with your lender or broker what limitations the products you are being offered have.

Let’s now have a look at some of the variable-rate product features that will allow you to use extra funds to pay your loan off earlier. 

Redraw facility
A redraw facility allows you to put what money you have left over on a regular basis into the loan, and then take out those extra funds should you wish to do so

A loan with a redraw facility is generally cheaper by way of the interest rate and fees charged than ‘bells and whistles’ type loans with added features. However, limit yourself to only putting what you have ‘extra’ into the loan itself. 

These type of loans are generally good for low to medium income earners, or for those that have trouble saving money or budgeting. The extra money you put into your redraw facility is not only coming off your mortgage for interest calculations, but is a way of ‘forcing’ you to save money at the same time. 

Offset loans
A 100 per cent offset account is similar in principle to an all-in-one account. Rather than holding all of your money in one home-loan account, a 100 per cent offset facility is a separate account run in conjunction with your home-loan account. It operates like a transaction account with an interest rate equal to that charged on your loan account.

For example, if your loan balance is $120,000 in a regular loan account, interest would be calculated on a daily basis and charged to the account each month on that full amount. If you have a 100 per cent offset account where you place all your earnings, and the balance of your savings is, say, $10,000, that money acts to reduce the balance on your home loan. Rather than earn interest on the $10,000 at the current term-deposit rate, which is always lower than the interest you pay on your home loan, the money in the 100 per cent offset account effectively reduces the balance of your loan, so you only pay interest on $110,000.

The poorer cousin to the 100-per-cent offset account is the partial offset account. When you put cash into a partial offset account, you only offset the home loan by the difference between the interest charged on your home loan and the interest earned on your savings account.
Use credit cards with interest-free days
You can use your credit card to pay bills and keep your money in your offset account longer.

Every day that your money is in your offset account is another day that interest is being calculated on a lower home-loan balance. As soon as you take money out of your offset account, interest is being charged on a higher loan amount.

Pay all your major bills on your credit card, and take full advantage of your interest free days (as well as any reward points you may have), and pay off your credit card out of your offset account just before your interest-free days are up. This way, you have left the maximum amount of cash in your offset account for the maximum amount of time, and have interest on your loan calculated on a lower loan balance for that time.

You can also use this principal with all-in-one facilities. 

All-in-one loans
All-in-one loan accounts allow you to pay your salary and extra income such as rent directly into the loan account, and effectively combine all your accounts such as loan, cheque, and savings accounts into one. This obviously brings down the amount you owe and as such, reduces the amount that interest is calculated on thus allowing you to pay off your loan more quickly. Any amount above your minimum monthly repayment can be accessed from your all-in-one account, much the same as normal transaction accounts. 

To take further advantage of this system, most lenders will allow you to connect a credit card to your all-in-one account. You should try and keep the maximum amount of money in the loan account for the maximum amount of time, as interest is calculated daily but charged monthly. You could pay most of your major bills and expenses by credit card and take full advantage of the interest-free period. You then clear your credit card once per month, preferably just before or just after your next lot of income has been added to the all-in-one account. This means that you have kept the majority of your income in the loan account for the longest time, have gained some more frequent flyer points, and have effectively used a credit facility to keep the wolves at bay while not paying interest on your credit card bills. 

All-in-one or offset-account loans are generally a little more expensive by way of rate and fees, however, they give you more flexibility by having all your regular funds offset the loan amount for interest calculations.

In summary, all-in-one loans or 100-per-cent offset loans allow you to use your mortgage as your key financial product and your savings and income to reduce the amount of interest you pay. Having a mortgage ‘account’ where you can deposit all of your income and draw on for living expenses, 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 effectively goes into your mortgage account, you are reducing the principal on which interest is charged every day.
Lines of credit
A line of credit may be good for things like renovations as you only pay interest on what you have drawn down. The cost of the loan, or interest rate, is generally at the higher end of the scale.

Think of a line of credit as being like a big cheque-book, where you have to pay interest on the total amount of cheques you've written. A line of credit, equity line, or equity loan, as they're sometimes called, is an approved limit of borrowings that you can use a piece at a time or all at once. 

Let’s say you've got a line of credit for $200,000. This means that you can use up to a total of $200,000 either all at once or a little bit at a time. You could, for example, invest $50,000 in the share market. Taking or receiving money from a loan or line of credit is called 'drawing it down'. As soon as you do this you will be making repayments on interest calculated on $50,000, not $200,000. 

If you were to use a further $70,000 for house renovations, for example, then you would be paying interest calculated on $120,000 ($50,000 for shares plus $70,000 for renovations) leaving you $80,000 that you could use on other items. If you don't use the remaining $80,000, then you won't have to make interest repayments on it.

Don’t forget that you can split a loan between two or more products, and that if your circumstances change, you can also change your loan to suit. For example, let’s say you had a loan split between a redraw facility for $180,000 and a line of credit for renovations for $30,000. 

When you have completed the renovations and have drawn down the bulk of your line of credit, why not look at adding that $30,000 into your redraw facility loan at a lower interest rate, and canceling the line of credit? 

Most brokers and lenders will offer a free “mortgage check up” to make sure that the product and structure you have best suits your needs. 

 Defining equity 
  • If you have already paid off some of your home, you are said to have equity. More and more people are taking advantage of equity in their homes to borrow money.
  •  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 through renovations can be a good way to increase the value of your home, particularly if you are planning to upgrade or move house. A higher sale price means you are able to pay off the initial mortgage faster and retain greater equity in the new property. 



Home loan packages
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 change 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. 

Pay fortnightly or weekly
Most loan repayments are calculated on a monthly basis. Most lenders, however, will give you the option of repaying your loan monthly, fortnightly, or even weekly. By paying your loan off weekly or fortnightly, you essentially get the equivalent of one extra month's repayment each year.

How does this work? Ok, let's say your minimum monthly repayment is $1200. You make twelve lots of monthly $1200 repayments each year as there are 12 months in the year, giving you a total of $14,400 in loan repayments for that year. 
If you halved your monthly repayment, so that you were paying $600 per fortnight, you would be making 26 payments of $600 each year. As there are 26 fortnights in a year, your total repayments for that year paying fortnightly would be $15,600; the equivalent of one month's repayment extra.

This extra repayment is helping to pay down your principal more quickly. If you paid fortnightly instead of monthly on a $150,000 loan over a 25-year loan term, with an interest rate of 6.57 per cent per annum, you could take just under 5 years off your mortgage and save about $52,000 in interest costs. 
Paying weekly will also give you the same sort of savings as you will still get the equivalent of one month's extra repayment in each year.

Making the same repayments at a lower interest rate
If interests rates go down, make sure your repayment doesn't go down with them. If you've been used to paying a certain amount on a regular basis, then you won't miss it. If you can maintain your repayment even if rates go down, you will build up equity in your property more quickly, and will save time and money in interest repayments.

One of the simplest ways to repay your home loan more quickly is to refinance your loan to a lower rate, but don't change the amount of your repayment. Continue to make payments at your old 'higher' rate.

This will allow you to pay off more of the principal with each payment, and will allow you to pay off your loan earlier. If you refinanced a loan of say $150,000 from an interest rate of 6.57 per cent to say 5.97 per cent, but continued to make repayments at the rate of 6.57 per cent, you could potentially save over 2.8 years off your mortgage, and as much as $35,800 in repayments.
You don't necessarily have to change lenders. Most lenders will let you conduct a 'loan variation' to change from one product to another for as little as $100 to $300 by only paying $50 per month extra. 
Most lenders also have a suit of products, and if you don't need a loan with all the bells and whistles, a simple cheaper loan product may be more beneficial for you. If you have previously used a broker and have been happy with their service, get them to check with your existing lender how much it would cost to change loans. In most cases the broker can arrange it on your behalf.

If you do decide to change lenders, find out what, if any, incentives the new lender will give you to get your business. Competition among lenders is at unprecedented levels. They are all dead keen to get your business. Try twisting their arm a little bit. Asking your lender for half a percentage point off their rate might not work, but see whether they will give you a break on establishment costs or ongoing fees.
Cutback on some minor luxuries
This is the bit you don't want to read. Once you have a mortgage, you may need to have a few less luxuries in your life, depending on how quickly you want to pay off your home loan. Unless you are a professional investor who can get higher returns than the equivalent benefit of your home loan interest rate, perhaps your extra money should go to reducing your principal and saving you money in the long run. The easiest way is to do a budget and make comparisons on the difference making various amounts of extra repayments will have on the overall time it will take you to repay your loan. That way you'll know what the effect is of putting some extra dollars into your mortgage rather than spending it on that weekly massage, car magazine, or KFC Bucket.

Maybe its time to get healthy
If you're a smoker or enjoy a few too many drinks on a regular occasion and are just looking for an excuse to get healthy, then paying off your mortgage more quickly is your chance! Why not give up smoking and put the money you would normally spend on cigarettes, for example, straight into your mortgage.

Let's say you're an average smoker who maybe smokes three packs per week. Let's also say that each pack costs around $9.00 each, which equates to $27.00 per week, $117 per month or $1404 per year. Let's also say you have a home loan of $150,000 over a 25-year term with an interest rate of 6.57 per cent per annum.

Interest rates are at a 50 year low - could now be the right time for you to refinance your home loan?

Instead of buying your 'ciggies' every week, let's say now that you've decided to kick the habit and now have an extra $117 per month to put into your loan. If you didn't put anything extra in apart from your $117, you would save just over 5.4 years off your mortgage, and approx $66,350 in repayments.
If giving up the cigarettes doesn't make you feel better, maybe and extra $66,000 in your pocket would. Imagine all the booze that would buy.

Professional packages
You may want to ask your lender or broker about qualifying for a professional package. Most of the larger lending institutions offer packages or discounts if your loan is over a certain amount, usually over $150,000, and subject to your income meeting their requirements. You generally don't need to be a 'white-collar' professional, and most lenders will not refer to these packages as 'professional packages', but by some other name.

These discounts may be between 25 basis points and 70 basis points off the interest rate, and changing to one of these packages with your existing lender may be only a phone call to your broker or lender away.
Ask your lender or broker if your loan size and income qualifies you for any discount. You might be pleasantly surprised.       
Double or multiple incomes
Another strategy for paying a loan off quickly if you have two or more income streams, is to dedicate one income directly into the mortgage, and live off the other one. If you are receiving rental income from an investment property, you may want to have this going straight into the mortgage.

The benefit of doing this is again that you never see the money from the income stream going into the loan, and therefore won't adjust your lifestyle to spend more. You also have the piece of mind that each time the salary is being paid to you, it's being used to pay off your loan at a much faster rate than if you were just meeting the minimum monthly repayments.

Structuring your loan
If you have an investment property which has a debt on it, and also have a debt on the home in which you live, you may want to have a look at the way your loan is structured.

For example, paying a principal and interest loan on both properties may not be the smartest set up for you. You may find that you get some tax benefits from your investment property. You won't, however, get any tax benefits on the property in which you live. Therefore, it makes sense to try and pay off the property in which you live as quickly as possible, while maintaining the tax benefits of your investment property.

One way to do this is to make the loan on your investment property Interest Only. This will allow you to free up some extra funds from the normal P&I repayment to this loan, and use it to put towards repaying the debt on the property in which you live. By way of example, let's say you had $150,000 debt on an investment property and were making P&I repayments at 6.57 per cent over 25 years, your monthly repayment would be $1019. If you changed it to an Interest Only loan, your repayment would then be $821 per month, giving you an extra $198 per month to put towards the debt on the property in which you live, on top of its normal monthly repayment. When you've paid off the debt on the property you live in, simply change the loan back to a Principal and Interest loan on your investment property, and tear into the debt on it using the tips you're currently reading.

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 - all of your other loans will increase in cost. 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 certain of is that the rate you are paying on your credit card and personal loan will be much 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 per cent on your credit card, you can transfer this debt to your home loan and pay about half the interest. Again, speak to your broker or lender to ask about the possibility and costs of consolidating. You may want to consider refinancing at the same time if you can get a better interest rate.

If you do decide to consolidate, make sure you don't fool yourself into thinking that you have paid these debts off. You haven't. You have just transferred them to a cheaper interest rate. Cut up that credit card or at least reduce the limits on it; don't think you have a free rein to run it back up to its limit, or you'll find yourself on the debt merry-go-round

GST for self-employed
If you are self-employed, you may want to look at putting the money you save for your quarterly GST payment into an offset account for your home loan.

Every day that this money sits in the offset account is another day that interest on your loan is being calculated on a lesser amount. When it's time to pay GST, you simply transfer the funds back into your business account and start all over again for the next quarter. You may want to check with your accountant on the best way to do this, and the effectiveness of so doing. 

Make sure your loan is portable
If there is any chance that you will move house during the course of your loan, 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. Again, your lender or broker will be able to give you information on loan portability.

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 cold hard cash for your upfront costs such as establishment fees, valuation fees and lender's legal costs. While this can seem a blessing when you take out your loan, try to avoid doing this.

The other thing you can do straight after getting a loan account is to make your first payment early. Most lenders will not expect you to make a payment until around 30 days after the loan settles. Why not make your first payment straight away and effectively be one payment up from day one? Remember, each day this payment is in there is another day that interest will be calculated on a lesser amount. You can continue this practice every year by giving your mortgage an 'anniversary present' and double your monthly repayment for that month every year. 

Post mortgage
Once you have paid off your mortgage, you will suddenly find yourself with extra money as you no longer have loan repayments to make. It is often said that we change our lifestyle to suit our income. If you have lived comfortably without this 'extra' money for so long, why not look at continuing to invest your repayment amount, or set up a separate savings account or fund for it? If you've not had it for some time you won't miss it, and it's a good opportunity to increase your wealth by saving or investing. You can even use this money as deposit for your next investment property.

Most of the above hints centre around putting extra funds into your mortgage. Only you can make a judgment on what is a comfortable compromise between lifestyle and paying off a mortgage early. You may be able to pay off your mortgage in five years, but what's the point if during that time you have been eating boiled shredded newspaper and making your own dog food? On the other side of the coin, some short-term pain by way of lifestyle curbing can have a long term gain by allowing you to live the remainder of your life debt free.

If you come across an unexpected financial windfall, why not give yourself a reward and take half, and put the other half into your mortgage? Whatever you decide to do, make sure you update yourself regularly and see if the loan product you have, or the strategy you are following, best suits your needs at the time. Happy investing.

Interest rates are at a 50 year low - could now be the right time for you to refinance your home loan?

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