Acquiring a mortgage is usually necessary to be able to buy your dream home, however it can be a large burden. Luckily, there are a range of things you can do to buy this debt off sooner – check our list below!
- Make as many extra payments as possible
The interest incurred on a home loan can be huge. Therefore the more you pay off sooner means you pay less interest, and can significantly reduce the total amount payable over the life of the loan.
- Imagine you have a higher interest rate
A great strategy to pay off your loan sooner is to make repayments based on a higher interest rate than you are actually paying. When calculating your repayments, add 2 or 3 points onto the current interest rate, and you will make great headway into paying off your mortgage!
- Look into financial packages
Financial packages, such as bundles of home loans with home insurance or fee-free credit cards, can represent great overall savings. When shopping around for a mortgage, be sure to ask what packages they offer.
- Avoid Honeymoon rates
So called “Honeymoon” rates can seem attractive to home buyers. These involve loans which have a cheap rate to start off with, which then goes up after the initial period (generally 1 – 3 years). The problem with these is that after the initial period your loan switches to a high interest rate which is usually higher than other loans available, and in most scenarios you end up paying more in interest over the whole life of the loan.
- Make payments more often
If you struggle to make big monthly payments above your minimum repayment, consider making smaller payments more often. Paying small amounts when you can can be a great way to chip away at your mortgage without suffering the pain of shelling out large amounts of cash at once – and these small amounts add up! Consider making regular fortnightly payments rather than monthly.
- Don’t just pay the interest
Especially in the first few years of the loan it can be common to pay off the interest only, without touching the principle at all. However, in order to pay off your mortgage quicker it is important to make sure you attack the principle straight away. Try to keep track of your mortgage and make sure you are paying down the principle, not just interest.
- Put all your debts in one place
If you have multiple debts – for example a personal loan and credit card as well as your mortgage – be sure to bring them all together under one loan. This means you can make one repayment for all, and most importantly will pay the same interest rate across the whole loan, which will almost always be lower for a home loan compared to credit cards and personal loans.
- Investigate All-in-one loans
All-in-one loans, also known as 100 percent offset loans, take this one step further by putting all of your finances together into one account. This means the same account where you take your mortgage from will also be the account that your income is paid from, and where you take money from for expenses. This can make a huge difference to paying off your loan because by putting your income directly into your mortgage account you will reduce the principal of your loan, and therefore reduce the amount of interest you are paying.
- Not sure whether to go for a fixed or variable interest rate? Try a split loan
Split loans, sometimes also known as combination loans, assign part of your loan to fixed interest rates, and the other part to variable. This means you are covered both ways, no matter whether interest rates go up or down.
- Pay mortgage fees and charges up front
When you take out a mortgage, there are a number of fees and charges which apply, which some lenders will allow you to add these to your loan rather than paying upfront. Although this can be tempting, it is better to pay these immediately to avoid having to pay interest on this amount in addition to the principal of your loan.
- Pay the first instalment in advance
Likewise, for new home loans you often are not liable to pay the first instalment until a month (or more) after settlement. However, making the first payment on the settlement date means you are closer to paying off the principal of your loan and lowering the total amount of interest you pay on it.
- Leverage your equity
Once you have paid off a portion of your house, that becomes an asset which you own. In financial terms, this is known as equity. You may also have additional equity if the value of your home has increased since you bought it, as equity is calculated based on the value of the property, less the amount owing on your mortgage. If you have equity on your home, and are thinking of borrowing money for other purchases such as a vehicle, you are much better off borrowing against the equity of your home loan and enjoying the lower interest rates.
- Shop around for the best deal
There are literally dozens of lenders and brokers to choose from, so make sure you do thorough research before settling on the best deal. Furthermore, when you do start the process of applying for your loan, make sure you are armed with all the information on alternative loan options, so that you can negotiate the best possible terms with your lender. Don’t forget that some lenders offer discounts to specific professional groups, so be sure to ask about this also.
- Be clear on the best loan for you
As you are investigating different loans and weighing up your options, make sure you are clear on what you want and need from your loan. Make a list of all the features you want from your home loan and rank them according to importance. Then assess each loan against these criteria.
- Include smaller lenders in your search
One mistake buyers often make is overlooking or being wary of smaller, “non-traditional” lenders. Although the big lenders may seem like the better option, many smaller lenders offer very competitive loans that are worth considering if they are the best option for you.
- Don’t be stuck with one lender
Even once you have signed up for a home loan, you shouldn’t stop looking around for the best rates. Always keep an eye out for new mortgage offers which may be better than your current loan, as in most circumstances you can change mortgage providers with little or no fees.
- Don’t be tied to one property
Given the length of time it takes most people to pay off their mortgage, it is very possible that you may want to move house in this time. If this happens, it is much more financially advisable to take your mortgage with you to the new property rather than closing out and applying for a new loan. When you sign up for your home loan in the first place, make sure it is transferrable to a new address without incurring ridiculous fees and charges.
- Open an offset account
If you have a savings account, consider changing this to an offset account instead. This means that rather than earning interest (which on most savings accounts is pretty minimal) you will offset the interest you are paying on your home loan. Ideally, you will find an offset account which pays the same rate of interest as the interest you have on your mortgage, giving you a 100% offset.
- Use your savings to invest
Once you have secured the best possible interest rates, you can really put the difference to work by using it to invest. If you take the money you would have been spending on interest rates and put it into stocks and shares, you may get a great return that you can ultimately use to pay off your mortgage. This will depend on various factors such as the current state of the share market and interest rates, so be sure to seek financial advice before making any moves.
- Don’t use bridging finance
Bridging finance may sound like an attractive option to cover buying a new home before you have sold your old one. However, this type of financing incurs interest rates which are significantly higher than the standard variable rate, costing you much more in the long run. Always sell your old property before buying a new one wherever possible, or if this cannot be achieved investigate a deposit bond instead.
- Live more frugally
This is no cunning trick, but rather a simple one: cut back on expenses you don’t need and put that money into paying off your mortgage sooner instead. You will be surprised how much you can saving by making your own lunches for work rather than buying them out, or by cutting out cigarettes or over-consumption of alcohol.
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