How to pay off your home loan faster - and save a small fortune

What the Banks and commission-based salespeople don't want you to know

One of the number one goals in your life ought to be getting the Banker off your back.

Regardless of your other life goals, once you are completely debt free you are largely in control of what you do with your money – and your time.

No matter what you may have heard elsewhere - the only way to pay debt off faster is to make additional payments.  But making additional payments when you have ‘spare cash’ or get around to it is far from efficient and very uncertain.

The best thing to do is implement some simple and consistent strategies.  These don’t take a lot of effort to put in place or maintain, and don’t require massive lump sums or significant surplus income – but can save you years off your loan and tens of thousands of dollars off your interest bill.

If you’re a Client of Independent Mortgage Planners – we’re already helping you to pay more off your loan by rebating back into your home loan (or offset account) the commissions that other Brokers keep.  What some commentators have called the "free money strategy" - because you're using money that normally goes to Mortgage Brokers or Bank Profits to get out of debt sooner and cheaper.

Here are some other things you can do:

  • Cut up your credit cards – pay them off – cancel the account – and then repeat after me – “I will never, ever again have a credit card and I will stop modelling for my children (or grandchildren) that its OK to buy consumer items with money I don’t have”.  By all means have debit cards so that you can still shop online etc – but at least you’re only spending money you have and that you are not (directly) paying interest on.  We say ‘directly’ because until you have wiped out all debt, every unnecessary expenditure is costing you interest (it’s called an “opportunity cost”).  Now, we know some people have managed to pay the full balance of their credit cards every month – and love their points and offers.  But – almost everyone (to be clear 98% of people) fail to pay their card in full at some point in their life and then it all snowballs out of control.  The credit card issuers know this and are counting on it.  That's why they have the points and the bonuses and all of the other marketing gimmicks.

  • Get rid of your consumer debt first.  Except in some very rare circumstances, your other consumer debts will be a higher interest rate than your home loan.  So, start by getting these paid down as quickly as possible – and pay only minimum repayments on your home loan until you have all other debts wiped out (it may sound counter-intuitive but its mathematically valid and it works).  As you pay off each debt take the repayment amount from that debt, and any additional money you were throwing at it, and put all of that as extra repayments against your next debt - and so on.  For maximum effectiveness, make a simple list of your debts from highest interest rate to lowest interest rate and start with the debt with the highest rate first.  Once you’ve got the first one or two paid out its amazing how quickly all of those extra repayments will get you to the point where you only have your home loan to worry about.

  • Now – smash your home loan.  Almost everyone who is on the same income as when they took their home loan out can be completely debt free – including the home loan - within 7 years.  This doesn’t require you to be a scrooge or discover “101 ways to feed your family on minced beef”.  It simply requires you to put some focus on becoming debt free – believe that you can do it – and be willing to reward yourself along the way.  For example, if you’ve been very aggressive at paying down your other debts (and you should be) then you don’t necessarily have to put every single cent of the extra repayments into your home loan.  You’ll definitely want to put most of it – but sit down and figure out what is sustainable and will still allow you to live a little.  You aren’t going to last a “7-year stretch” on bread and water.  It will get too tough for you, and your family, and you’ll lose belief and quit.  But here are some simple things you can do rather than just seeing it as a grind to make extra repayments:

  • Make weekly or fortnightly payments based on your pay cycle – equal to either ¼ (weekly) or ½ (fortnightly) of your scheduled monthly loan payment.  Important:  This helps you get out of debt faster simply because you are effectively making an extra (or 13th) monthly repayment each year.  But the Banks have got wise to this – so unless you specifically ask them to arrange the payment as we’ve described it here, they will screw you over.  That is, if you just tick a box on a Form that says you want to make weekly or fortnightly payments, they’ll divide the minimum annual payment by 52 (or 26) so that you still only make the minimum payment and don’t get ahead on your loan.  And make sure you adjust each time there is a rate change or the Bank will press the button marked “More Interest for Us” and reset your repayments to the lower amount.

  • Pay a little more each month.  No matter what happens to interest rates – every time there’s a rate change you can look at the new minimum payment advised by the Lender and add a fixed amount to it - or a percentage.  Some people like to add 10% – which has become known as the “GST approach”.

  • Put any lump sum ‘windfalls’ into your mortgage.  Sure, keep a bit for fun or to spoil yourself - but keep the ratios correct – i.e. more for your serious ‘debt-free’ goals and less where the joy is brief.

  • If rates decrease – keep your payments the same.  Again, make sure you give clear instructions to the Bank.  Otherwise they’ll automatically reduce the repayment so that you stay in debt for as long as possible.

  • Review your loan after 2 years and every year thereafter.  Do what is known as ‘mark to market’.  But make sure you’re comparing apples to apples – including all costs – and not swallowing the marketing hype or “shiny object” dangled by the home loan salespeople (Bankers and commission-based mortgage brokers).  N.B. if you’re a Client of ours we’ll offer you a free Desktop Review to do this for you.

  • Upgrade your car (and your holidays) as rarely as possible – until such time as you’re completely debt free. 


Congratulations!!   You’ve just won the mortgage game!!

Once you're debt free all your money is yours, after your basic cost of living expenses – so do with it want you want.  Obviously save some for a rainy day and invest some for your future – but you will suddenly have a lot of spare cash.  Enjoy it – you’ve earnt it. 

Yes – becoming debt free takes a bit of thought and a little bit of effort from time to time.  You don’t have to implement all the above tips, of course.  Choose what you think suits your personality and lifestyle and that you believe you can make work.

But there are very few areas of your life where a small amount of consistent focus, and the occasional resetting of the dials, can give you as much ‘bang for your buck’.

Applying just some of the strategies outlined above can save you 10 years, or more, off a 30-year mortgage and tens of thousands (even hundreds of thousands) of dollars off your total interest bill.  Unless you love the Big Bank CEOs – make sure that money is in your pocket – not in their bonuses.


Conclusion

We hope this Fact Sheet has helped you with other ways that you can “win the mortgage game”.

If you have any questions or want some assistance, please feel free to Contact Us.



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If you have been directed to this Fact Sheet by your Independent Mortgage Planner it is in order to allow you to review some relatively detailed considerations in your own time and at your own pace. Only any specific advice subsequently, or previously, provided by your Independent Mortgage Planner constitutes personal advice. In all other circumstances, the information provided in this Fact Sheet is general in nature only and does not constitute personal advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this Fact Sheet you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to speak to an Independent Mortgage Planner. We provide Credit Advice only. You may also wish to seek appropriate legal, tax, and other professional advice.

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