Simple Steps To Reduce Your Mortgage

Posted on 13/10/2016  
Simple Steps To Reduce Your Mortgage

Many Australian households are ahead on their home loan repayments, taking advantage of low interest rates to reduce their mortgages.

Multi-disciplinary advisory PPI Advice says paying the mortgage off quickly can make it easier for home-owners to enter the property investment market.

Matthew Wall, director of PPI Advice, says that when faced with the choice of paying off a home loan quickly, or an investment property loan, it’s better to reduce the debt on the home loan first. There are no tax benefits associated with home loan costs.

As the debt on a home loan reduces, the equity in the property builds, creating opportunities for the owners to invest in more property. The growing equity in the home can be used as a deposit on the purchase of a new investment property.

(To access a free report on investment and a complementary session with an advisor from PPI Advice - $495 value free of charge - click here.)

Wall says the most common strategy for reducing a mortgage is to increase the amount and frequency of repayments. Simply changing monthly repayments to fortnightly or weekly can make a difference, as can something as small as increasing repayments by $10 a week.

Minor windfalls, like a bonus from work or birthday money from a grandparent, can help.

With the mortgage market becoming extremely competitive, a strategy that is gaining momentum is to shop around for another lender. Some of the better terms and conditions that you may be able to secure include:

  • A lower interest rate
  • Lower or zero monthly fees
  • Credit card with interest free period (55 days is ideal)
  • Ability to make extra repayments
  • No penalties for early discharge
  • No charges for transferring money between accounts within the same bank
  • Line of credit facility at favourable rates and terms
  • Option to go from principle and interest to interest only with minimal charges.

 “It helps to record the comparisons on a spreadsheet, thus making it easier to make an informed decision,” Wall says.

“Once you have narrowed down the best deal, present the terms and conditions to your existing lender and ask if they can match it. If not, take your business to a new lender.”

Another approach is to set up an offset savings account which is linked directly to the mortgage. The credit balance in the offset account is deducted from the home loan debt each day when interest is calculated, therefore reducing the amount of interest paid. The higher the balance in the offset account, the less interest paid on the mortgage.

“The benefits of reduced interest mean it can be advantageous to have all income paid into the offset account and the loan repayments sourced from it as well,” Wall says.

A credit card with an interest free period can potentially give you use of the bank’s money, instead of your own, for up to 55 days. An automatic payment programmed to repay the credit card on the due date can also be arranged from the offset account.

Wall says people with several loans - e.g. a personal loan, car loan and credit card debt - should consider consolidating them all on to the home loan.

“The interest rate on a home loan is significantly lower than personal loans and credit cards, around 10–20%, therefore you can achieve big savings on interest,” he says.

“Because the home loan term is also longer than a personal loan, your repayments are lower, easing your monthly cash flow.

“But be aware that you are now potentially paying off your car over the 25–30 year term of the home loan instead of a shorter term of up to seven years. In order to keep your car loan component contained, it makes sense to make your home loan repayments higher than stated on the home loan contract.”

A final tip is to establish a line of credit, which could cover contingencies on a rainy day.

Wall says good money managers are disciplined - they establish budgets and goals, while maintaining good records. They pay their credit cards in full each month and resist temptation to drawn on a line of credit unless there is a genuine emergency.

PLEASE NOTE: Any information contained within this article should not be treated as financial advice. Please consult an ACL holder to discuss your personal financial situation.

(To access a free report on investment and a complementary session with an advisor from PPI Advice - $495 value free of charge - click here.)

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