Most home owners would be pretty shocked to discover they will be nearly two-thirds into a 30 year home loan before they reach “tipping point”, or the point at which the repayments are paying off more principal than interest.
With a few simple savings techniques and smart use of any additional lump sum payments received you can more quickly transition the average Australian’s biggest debt into your largest asset.
Strategy 1 – Rounding up Mortgage Repayments
If you round up a monthly mortgage repayment of for example $2661 to $3000 (for a $400,000 loan at 7% over 30 years) this can bring your tipping point forward by 9 years, and enable you to pay off your loan in 22 years, and save around $182,000 interest.
Strategy 2 – Maintain Repayments at Higher Levels when Interest Rates Drop
Interest rates are currently falling, and consequently the minimum repayments required are falling too. However, if you maintain your repayments at the levels required before the interest rate cuts, you will reduce your interest and start paying off your principal sooner.
About two-thirds of Australian borrowers have maintained their higher repayment levels, despite recent interest rate cuts.
Strategy 3 – Change from Monthly to Fortnightly Repayments
Changing from monthly to fortnightly repayments, effectively adds another payment in each calendar year, increasing payments from 12 per year to 13 per year, and reducing both the interest and length of time to repay your loan.
Strategy 4 – Offset Accounts
Most lenders offer an offset account which is simply a savings account linked to the home loan account where the balance in the savings account is offset against the home loan. The savings above loan repayments reduce the loan amount, and the interest payable on the home loan, over the life of the loan.
This is particularly effective for higher tax-rate payers who would otherwise have to pay tax on interest earned in savings accounts.
Strategy 5 – Review the interest rate you are paying
A Broker can tell you which bank offers the best rate and product for you situation. A Broker by law must act on your best interests and it does make sense to get the best deal. If you don’t know a broker, give us a call and we can refer you to one we know.
An example of the Big 4 banks current Fixed Rate offers can give you an indication of whether you do need a review. A broker generally deals with 20 plus banks and because of this often gets access to even more discounts and special offers the various banks make to attract new clients.
Implementing some or all of these strategies can help cut your massive interest bill and reduce your principal, reach that tipping point earlier and become mortgage free sooner.
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General Advice Warning
The information on this website is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.
Whilst every care has been taken in the preparation of this website, BND Financial Pty Ltd (‘BND Financial Services’), its directors, authors, consultants, editors and any persons involved in the construction of this website, expressly disclaim all and any form of liability to any person in respect of this website and any consequences arising from its use by any person in reliance upon the whole or any part of this website.
