How can I pay off my mortgage quicker? It’s a question I get asked a lot.
Most people know that repaying home loans quicker is good for your bank balance. In theory, it makes sense. In practice? Not so easy. Or so people think.
So, we spend 30 years or what I call a marathon of payments to the bank so we can call a home, our home.
Many of us also own investment properties. The logic being that wealth will be created in the long term, but usually in the short term there can be financial pain.
Our homes are usually the largest purchase we make in our lives and there are a few simple ways to cut years off a mortgage.
Many believe that making larger ‘one off’ payments against a loan is a good thing. It is, but generally we find that those that overpay on each payment make larger savings. This is because it is consistent so make a larger difference.
The larger ‘one off’ payments only happen when you have spare cash. And that is usually not often.
Small extra repayments
Depositing lump sums, such as a bonus, will always be beneficial, but regular, small repayments can seriously save you some money.
Here is an example.
Joan has a loan of $500,000 loan with an interest rate of 3.50% p.a. over 30 years.
She pays an extra $50 per fortnight.
The end result?
Well, she will save a whopping $27,000 in interest or which is the same as over 2 years off her loan. $50 a fortnight is quite achievable.
Change Payment Frequency
Change how often you make repayments from monthly to fortnightly or even weekly.
You may think this make no difference, but it does. This is the power of numbers.
You see there are 12 months in a year. Yeah, I know you do not need to be a genius to work that one out.
But this equates to 13 four-week cycles. This means if you move from monthly to fortnightly, you are paying an extra month per year. And that is with no extra in cash dollars. It’s a no brainer so just do it.
Do you Have the Right Loan?
The banks have all kinds of rules on their loans, so it makes sense to know them.
Some will allow overpayments and then allow you to take the extra money out when you need it.
Some will link your savings account to a loan so that you get no interest on savings but the interest you pay on your loan is reduced by the savings amount.
Some will charge you for the privilege. Others will not.
Some will allow you to make overpayments but then not allow you to take it out if you need it.
Some will charge you a penalty if you do anything different than normal repayments.
It’s all very confusing.
Try to get a flexible loan. Our loans are for a marathon period of 30 years but during that time our personal circumstances change. We have children which means most costs. So, its best to get a loan that is flexible.
Yes, you can always shop around and move your mortgage by refinancing. But there may be exit and new loan charges and, let’s be honest, I have yet to meet anyone who loves the idea of filling out a loan application form.
Which Loans Should I Repay First?
Many have multiple loans from home loans, investment property loans to personal loans. If you have multiple loans, I always say pay off the loan with the highest rate of interest. But that is not always the case.
It really depends on personal circumstances.
If you have one loan which is not tax deductible (such as a home loan) and another that is (such as an investment loan) you should consider paying the home loan off first. Here’s why.
The interest on your home loan cannot be deducted for tax, whereas the investment property loan can.
Paying off the home loan first is more likely to leave you with more money in your pocket.