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For most of us, our mortgage is our biggest financial burden and one that will last for decades to come. However, it’s important to remember that the life of a home loan doesn’t need to be as long as the contract suggests; you’re free to pay it off faster and take that financial load off your shoulders sooner.

Chipping away at your mammoth mortgage takes a committed plan, so here are some savvy ways to be debt-free earlier than originally planned.

Consider making fortnightly payments

If you’re paying your mortgage off monthly, consider switching to fortnightly repayments. It may seem like a trivial move, but by paying half the monthly amount every two weeks you can actually make the equivalent of an extra month’s repayment each year. This small move will compound over the life of your loan, reduce the interest paid and allow you to pay off your principal sooner.

Case study

Peta and Alex have a new home loan of $500,000 at a variable interest rate of 6.66% per annum and they’ve chosen to repay principal and interest over a 30-year term. Their monthly repayments at that rate would be $3,213 (not including additional fees).

But if the couple decide to make fortnightly repayments of half their original monthly repayment ($1,607) they would be paying more off their mortgage by the end of the year, i.e., less interest therefore saving them money.

In the long term, they’d pay off their loan more than six years sooner and save around $160,000 in interest (if their interest rate remained the same for the life of the loan).

What to Consider

Before adjusting, chat with us to understand how your current loan is calculated. Not all banks define the term ‘fortnightly’ in this way.

    Make a lump sum payment

    A one-off lump sum payment like a redundancy cheque or inheritance as well as semi regular additional payments such as a tax return or work bonus – especially during the first few years of a typical mortgage – could carve years (and cash) off your mortgage and help you get debt-free faster.

    Case study

    Anika took out a $500,000 mortgage at a rate of 6.66% for 30 years and has been making fortnightly repayments of $1482. By year five she took a redundancy payout of $30,000 and chose to put $20,000 into her mortgage. As a result, she will save about $77,000 in interest (assuming the rate remains the same) and slash two years and six months off the life of the loan.

    What to Consider

    It’s important to note that placing a lump sum payment on your mortgage won’t lower your repayments. However, it will help you save on the interest component and lower the total amount of time left on your home loan.

    Look at refinancing

    By giving your existing mortgage a health check, you could find there is a better rate, or even a better bank, out there for you. Just because you signed on the dotted line for 20, 25 or 30 years doesn’t mean you need to stick with the same lender.

    Refinancing could get you a lower interest rate which would ease the hip pocket, but if you can manage to keep making the higher repayments moving forward, you’ll end up reducing the life of your loan.

    Case study

    Selina and Jon are paying 5% on their $450,000 principal and interest mortgage with monthly repayments. This would add up to around $420,000 in interest alone for the 30-year loan. If they found a rate that was just 0.25% lower (assuming all other loan variables stay the same), they would save approximately $25,000.

    What to Consider

    If you have at least 20% equity in your home and a great credit score, you’ll have more bargaining power. Carefully read the fine print to be aware of hidden costs like annual fees or ‘honeymoon’ interest rates that could change after an introductory period, application fees, valuation fees and break fees. Contact our lending specialists to see how much money they can save you.

    Get into an offset account

    You don’t need to keep your savings and your mortgage separate they work better together. By putting your savings or even salary in an offset account with a redraw facility, you can reduce the amount of interest you pay but still have access to your funds if you need them.

    Ultimately, the more money you keep in your offset account, the bigger the savings and the faster your loan will be paid off.

    Case study

    With a home loan balance of $500,000, Ari keeps his $25,000 savings in his offset account. By doing this he’s only going to pay interest on the balance of $475,000 (not the original $500,000).

    What to Consider

    Some lenders only offer partial offsets, meaning the mortgage interest repayments are only reduced by a certain percentage of your account balance. It’s wise to chat with us about the fine print.

    To work out how you could be mortgage-free sooner while shaving thousands off your home loan talk to us today.

    NOTE: Interest rates, fees, regular repayments, and the potential savings will vary depending on your unique circumstances. All calculations have been calculated using the moneysmart.gov.au mortgage calculator.

    Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.
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