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18 Ways to Reduce Your
Mortgage Loan
by
Kevin Saunders
1. Skip the introductory rate (Honeymoon)
Beware of lenders bearing gifts! Introductory or
honeymoon rates have long been an important marketing
tool for lenders. You are initially offered a cheap rate
on your loan to get you in the door but once the
honeymoon period is over, the lender will switch you to a
higher variable rate of interest. An example of this is
an Adjustable Rate Mortgage (ARM).
There are two problems with this scenario. First, the
variable rate is often higher than some of the lower
basic loans available so you could end up paying more.
Second, you need to clearly understand that a honeymoon
rate applies only for the first year or two of the loan
and is a minor consideration compared to the actual
variable rate that will determine your repayments over
the next 20 or so years.
You may also be hit with fairly steep exit penalties if
you want to refinance in the first two or three years to
a cheaper loan. So make sure you fully understand what
you are letting yourself in before setting off on a
"honeymoon" with your lender.
2.
Pay it off quickly
Time is money. There are all sorts of strategies for
paying less interest on your loan, but most of them boil
down to one thing: Pay your loan off as fast as you can.
For example, if take out a loan of $300,000 at 6.5 per
cent for 30 years, your repayment will be about be about
$1,896. This equates to a total repayment of $682,632
over the term of your loan.
If you pay the loan out over 15 years rather than 30,
your monthly payment will be $2,613 a month (ouch!). But
the total amount you will repay over the term of the loan
will be only $470,397 - saving you a whopping $212,235
· Make repayments at a higher rate
A good way to get ahead of your mortgage commitments is
to pay it off as if you have a higher rate of interest.
Get a loan at the lowest interest rate you can and add 2
or 3 points to your repayment amount. So if you have a
loan at about 6.5 percent and pay it off at 10 per cent,
you won't even notice if rates go up. Best of all, you'll
be paying off your loan quicker and saving yourself a
packet.
· Make more frequent payments
The simple things in life are often the best. One of the
simplest and best strategies for reducing the term and
cost of your loan (and thus your exposure should interest
rates rise) is to make your repayment on a fortnightly
(bi-weekly) rather than monthly basis. How can this make
a difference I hear you ask? It works like this:
Split your monthly payment in two and pay every
fortnight. You'll hardly feel the difference in terms of
your disposable income, but it could make thousands of
dollars and years difference over the term of your loan.
The reason for this is that there are 26 fortnights in a
year, but only 12 months. Paying fortnightly (bi-weekly)
means that you will be effectively making 13 monthly
payments every year. And this can make a big difference.
Using our example from above, by paying monthly, you will
end uprepaying $682,632 over the term of your loan. But,
by paying fortnightly (bi-weekly), you will save $87,254
in interest and 5.8 years off the loan. Zero pain to you,
major benefit to your pocket.
· Hit the principal early
Over the first few years of your mortgage, it may seem
that you are only paying interest and the principal isn't
reducing at all. Unfortunately, you're probably right, as
this is one of the unfortunate effects of compound
interest. So you need to try everything you can to get
some of the principal repaid early and you'll notice the
difference.
Every dollar you put into your mortgage above your
repayment amount attacks the capital, which means down
the track you'll be paying interest on a smaller amount.
Extra lump sums or regular additional repayments will
help you cut many years off the term of your loan.
· Forego those minor luxuries
This is the bit you don't want to read. Once you have a
mortgage, your life is likely to be luxury-free (or at
least pretty close to it). Think of all the weight you
will lose by giving up your favourite indulgent snack.
For the sake of your health you should quit smoking and
drink less anyway. Take your lunch from home and save on
bad fast food. Trust me, your body will thank you for it.
If you're still not convinced consider the following
example. A typical day may include a pack of cigarettes
($10), a coffee and donut ($5), lunch ($12) and a couple
of beers after work ($8). That's $35 a day or $175 a week
or $750 a month or $9,100 a year.
Assuming a mortgage of $300,000 at 6.5 per cent over 30
years, by making $750 in extra repayments each month,
you'd save more than $216,000 in interest and be mortgage
free in just over 14.5 years.
No one is saying you should live a convict existence but
just cutting down a little on your expenses will see you
reap huge financial benefits.
3. Get a package
Speak to your lender about the financial packages they
have on offer. Common inclusions are discounted home
insurance, fee-free credit cards, a free consultation
with a financial adviser or even a fee-free transaction
account. While these things may seem small beer compared
to what you are paying on your home loan, every little
bit counts and so you can use the little savings on other
financial services to turn them into big savings on your
home loan.
There are also "professional" packages on offer
for amounts over a certain limit, which can be as little
as $150,000. Some lenders offer discounts to specific
professional groups or members of professional
organizations. Ask your lender if your occupation
qualifies you for any discount. You might be pleasantly
surprised. There are all sorts of discounts and
reductions attached to these packages so make sure you
ask your lender about them.
4. Consolidate your debts
One of the best ways of ensuring you continue to pay off
your loan quickly is to protect yourself against interest
rate rises. If your home loan rate starts to rise, you
can be absolutely positive about one thing - your
personal loan rate will rise and so will your credit card
rate and any hire purchase rate you may happen to have.
This is not a good thing as the interest rates on your
credit cards and personal loans are much higher than the
interest rate on your home loan. Many lenders will allow
you to consolidate - re-finance - all of your debt under
the umbrella of your home loan. This means that instead
of paying 15 to 20 per cent on your credit card or
personal loan, you can transfer these debts to your home
loan and pay it off at 7.32 per cent.
As always, any extra repayments or lump sums will benefit
you in the long run.
5. Split your loan
Many borrowers worry about interest rates and whether
they will go up but don't want to be tied down by a fixed
loan. A good compromise is a split loan, or combination
loan as they are often known, which allows you to take
part of your loan as fixed and part as variable.
Essentially this allows you to hedge your bets as to
whether interest rates are going to rise and by how much.
If interest rates rise you will have the security of
knowing part of your loan is safely fixed and won't move.
However, if interest rates don't go up (or if they rise
only slightly or slowly) then you can use the flexibility
of the variable portion of your loan and pay that part
off more quickly.
6. Make your mortgage your key financial product
Mortgage products known as all-in-one loans, revolving
line-of-credit or 100 percent offset loans allow you to
use your mortgage as your key financial product. This
means you have one account into which you can pay all of
your income and draw from for your living expenses by
using a credit card, EFTPOS or a checkbook, as well as
making your mortgage repayments..
These types of accounts can make a huge difference to the
speed at which you pay off your loan. Because your whole
pay goes into your mortgage account you are reducing the
principal on which interest is charged. Sure, you might
take a couple of steps back as you withdraw living
expenses but careful use of this sort of product can get
you thousands of dollars ahead of where you'd be with a
"plain vanilla, pay once a month" home loan.
These loans work well when you are able to make
additional payments towards the loan. If you are only
able to make the equivalent of the minimum repayment on
your loan (and not put in any extra) you may
be better off with a cheaper standard
variable or basic variable loan. However, it's not
unusual for dedicated borrowers using these types of
loans to cut the term of a 30 year-old loan to less than
ten.
7. Use your equity
If you have already paid off some of your home, you are
said to have equity. Equity is the difference between the
current value of your property and the amount you owe the
lender. For example, if you have a property worth
$500,000 on which you owe $150,000, you are said to have
home equity of $350,000, which you can re-borrow without
having to go through the approval process by accessing it
through your existing loan.
Many lenders will allow you to borrow using your equity
as collateral. Most lenders will allow you to borrow up
to about 80 per cent of the loan-to-value ratio (LVR) of
your available equity. If you are careful, you can use
this equity to your advantage and help to pay off your
home loan sooner.
Using an equity loan to improve your property could be a
good way to ensure that your home increases in value over
time. But larger expenses such as cars and holidays that
would have been paid by credit card are more affordable
on the lower rate of your home loan.
8. Switch to a lender with a lower rate (But do your
sums)
It may sound like a simple idea but switching out of your
current loan and taking out a loan at a lower rate can
mean the difference of years and thousands of dollars. If
you have a loan that is tricked up with all the features,
or even if you have a standard variable loan, you might
find that you could get a no frills rate that is as much
as a percentage point cheaper than your current loan.
However, before you jump the gun, check out what it will
cost you to switch loans. For example, there may be exit
fees payable on your old loan and establishment fees and
stamp duty on your new loan. Work it all out and if it
makes sense, go for it.
9. Stay informed - don't forget about your mortgage -
visit www.mortgageloanhints.com
With any long-term commitment, there is always the
temptation to let your mortgage roll along, make your
repayments as they fall due and think as little about it
as possible. As long as you keep up the repayments,
there's not much else you need to do, right?
This attitude can be a big mistake. Keep yourself up to
date with what's happening in the marketplace. You might
find that there's an opportunity to put yourself well
ahead of the game. Rates change, new products and changes
in the market itself may allow you to seize an
opportunity or negotiate a better deal.
Stay informed and stay ahead of the game.
10. Get a cheap rate and invest the difference
When interest rates are low, like now, it is usually safe
to say that inflation is also low. Thus, bricks and
mortar may not be the best place to invest. Try getting
the cheapest home loan you can find and make the minimum
repayment. This allows you to use the extra cash to
invest in other, more profitable areas.
You may find that the return you get on shares or some
other type of investment means that you have created a
nice little nest egg which you can use to pay off a
bigger chunk of your home loan than you might otherwise
have been able to do.
But beware - high returns often mean high risks. Before
undertaking any investment, invest in a consultation with
a qualified financial adviser.
11. Run an offset account
Instead of earning interest, any money you have in your
offset account works to offset the interest you are
paying on your home loan. For example you may have a
mortgage of $300,000 at 6.5 percent and an offset account
with $50,000 in it earning 3 percent.
This means that $250,000 of your loan is accruing
interest at 6.5 percent but the rest is accruing interest
at just over 3.5 percent (6.5 percent on your loan less
the 3 percent the $50,000 in your offset account is
earning). Imagine how much you can save!
Of course, the best sort of offset account pays the same
rate as your loan (100 per cent offset).
12. 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 cash for your upfront costs.
While this can seem a blessing try to avoid doing this.
Consider the following example:
Borrower A borrows $300,000 over 30 years at 6.5 percent.
Her upfront costs are $1,000 but she has enough cash to
make sure she can cover these. Her total repayment over
30 years will be $682,632
Borrower B takes out the same loan but doesn't have
enough cash to cover the upfront costs. So he borrows
$301,000, at the same rate. Her total repayment over 30
years will be $684,907.
Two thousand odd-dollars might not sound like a huge
amount but what could you buy with it if it stayed in
your pocket?
13. Pay your first instalment before it's due
With most new loans, the first instalment may not become
due for a month after settlement. If you can manage it
(and your lender will let you), pay the first instalment
on the settlement date. If you do this, you will be one
step ahead of the lender for the term of your loan. Every
little bit counts.
14. Shop around and make sure your lender knows it
One of the most powerful tools you can have in the search
for the best home loan is information. Make sure you have
rung half a dozen lenders and brokers (as well done some
internet research) before you start talking to your
preferred lender about getting a new loan or refinancing
your existing loan.
Make sure you know what rates and features are offered by
each of your lender's competitors on comparable products.
Be ready to tell the lender what you are looking for and
don't be afraid to ask for extras. If they want your
business, and know you know what you are talking about,
they may be prepared to work that little bit harder to
get your business.
Don't be afraid to walk out if you aren't getting the
best possible deal you can.
15. Make sure your loan is portable
If there is any chance that you will move house during
the course of your loan (and let's face it, there is a
strong chance), 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.
Be careful. 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.
16. Avoid bridging finance
Someone once said bridging finance is so called because
it allows you to "pylon" the debt. The joke's
appalling, but so is bridging finance. Unless you get
your timing right you could find yourself with two home
loans at the same time - with the bridging finance
element costing you an extra couple of percent premium on
the standard variable rate.
Consider using a deposit bond or selling before you buy,
as it will be much more cost effective for you than
another loan.
17. Choose the loan that suits your needs
Choosing a loan is about knowing what you want. Draw up a
table of potential home loans and rank them. Make a list
of all the features that are important to you and rank
them according to importance. Give each feature a score
out of 5 - one for unimportant right through to 5 for
indispensable.
Use this technique for ranking the loans on offer and
pretty soon you'll see the one that's right for you.
Remember, different loans have different purposes so you
need to match a loan to your need. Taking out an interest
only loan suitable for investors if you are planning to
live in the house is just foolish.
Ditching the features you don't need can save you up to 1
per cent on the interest rate of your loan. Over 30 years
that's a whole lot of money you've just saved yourself.
18. Don't be afraid of smaller lenders with cheap rates
Since the advent of the mortgage managers over the past
five or six years there's been a lot of talk about
smaller and "non-traditional lenders" and how
they have forced interest rates down. With the property
boom, plenty of opportunities sprang up for smart lenders
with low fees willing to take on traditional lenders and
many have done very well indeed.
Some borrowers worry about what might happen if their
lender gets into financial trouble. Keep in mind that
you've got their money - so don't worry too much. There
are some smaller lenders whose names might not be readily
familiar but whose rates might be enough reason to get in
touch.
Be wary, however. Some of these smaller lenders can have
huge hidden fees and charges. It is true that the
interest rate might be much lower, but in many cases,
they exit (or penalty) fees can be very high if you
refinance or pay off your mortgage in the first couple of
years. Of course, if you're planning on staying with that
lender for some time, then these fees will not impact
your pocket at all.
Kevin
Saunders is one of the founders of MortgageLoanHints.com,
bringing you tips and hints for paying off your mortgage
quickly, helping you to use the power of a mortgage loan
to increase your wealth and learn to take control of your
own finances. You can see more of Kevin's articles here: http://www.mortgageloanhints.com
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