Mortgages are a double-edged sword. While they’re the best way to secure potentially the most valuable asset you’ll own, they can be very expensive and slow down your wealth creation.
In part, this is because too few of us are utilising the best ways to manage our mortgages. Fortunately, there are a number of easy and effective ways to help you reduce mortgage costs.
By putting down as large a deposit as comfortably possible, you can reduce the principal of your home loan and thereby save on interest. You’ll also avoid unnecessary fees such as lender’s mortgage insurance (LMI) if you can pay at least 20 per cent of the value of the home up front. With a $500,000 loan, LMI has the potential to cost between $15,960 for a 5 per cent deposit and $4,803 for a 15 per cent deposit, according to Canstar.
Selecting a shorter mortgage term has its share of challenges – you’ll be required to pay more for each repayment and may struggle to have your loan approved. That said, shortening a $500,000 loan with an interest rate of 3.99 from 30 years to 25 could save you over $50,000 in interest.
An offset account is a fantastic way to accrue savings while cutting down on mortgage interest. When interest is calculated, the balance of your offset account is subtracted from the amount borrowed, meaning you will ultimately pay less in interest as your offset balance grows.
Don’t be afraid to make additional repayments towards your mortgage debt. Any windfall from bonuses, inheritance or otherwise can be put towards your mortgage principal to progress your repayment and reduce the amount of interest you pay.
You can also speed up your mortgage repayment process by changing the frequency of your payments. There are 12 months in a year but 26 fortnights. So, if your monthly repayments are $2,394, by paying half of that ($1197.50) every fortnight, you’ll essentially add an extra month’s repayment each year. By budgeting around this, you may not even notice the extra money spent.
When interest rates fall on our variable loans, it can be tempting to allow your repayments to drop as well. Maintaining the same repayment value means you’ll continue to slowly chip away at the principal, reducing interest costs and simplifying your budgeting process.
Managing the value and frequency of your repayments can ultimately cut down your interest costs.
Home loans are generally considered to be ‘bad debt’ because they don’t generate an income, nor are they tax-deductible.
By leveraging the equity in your home to secure an investment loan, and putting that money towards an income-generating asset, you can gradually convert your mortgage into good debt. While this still leaves you with a loan, your investment debt will help you to generate an income and you’ll be able to claim deductions of interest paid.
Knowing when and why you should review your mortgage is vital. In most cases, you simply can’t afford to set and forget your home loan, so a regular mortgage health check helps you to identify problems and opportunities for saving.
— Invest Blue (@investblue) April 6, 2018
It’s not uncommon to enter a mortgage with a great promotional deal, usually including a low fixed interest rate for the first few years. However, once this period ends you may find that your mortgage isn’t as cheap as you thought it was. By replacing your home loan with another product, whether from the same or a new provider, will ideally let you secure a lower rate or greater flexibility.
Before refinancing you should consider whether this is the best option for you.
There’s no shame in realising your boots are too big for your feet. In downsizing, you can sell off your home to settle outstanding mortgage debt and instead begin renting or seek a more affordable, smaller home loan.
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