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 Mortgage Loan Hints.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.