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Make extra repayments
The most common mortgages for home
buyers require you to pay principal and
interest. On a typical mortgage, any extra
payments you make in the first five to eight
years (when most of your repayments are
primarily paying off the interest) are especially
good at cutting your interest bill and
shortening the life of your loan.
Make extra
payments as early as you can
because these
loans are interest heavy up front and the faster
you repay the better.
Consider making repayments on a weekly or
fortnightly basis to reduce interest and the
term of a loan.
Mortgage offset account
A mortgage offset account can save interest
on your loan. Your mortgage is linked to a
savings account into which your salary and
other cash can be deposited and from which
you withdraw to pay bills, credit cards etc
when these debts become due. For the period
of time your money sits in this account, it is
‘offset’ against your loan and so reduces your
interest bill.
Make an annual lump sum payment
Use your tax refund or a windfall, such as
an inheritance or work bonus, and apply
it directly to your principal. Check your
mortgage documents to find out how often
you can prepay and in what amount.
Prepay a little every month
Get a copy of your loan amortisation schedule
which will show the breakdown of interest
and principal. If you’re making a payment for
November, for example, look at the next line
down on the principal reduction line and you
will see that the principal reduction for the
next month, December, is say $24. Making
that $24 payment early means that your ‘true’
mortgage balance is one payment less after
the principal is prepaid. So in essence, you’d be
making an extra payment each year.
Redraw facility
A redraw facility allows you to make extra
payments and then withdraw them if you
need them. You can only redraw the additional
payments you make, and sometimes this type
of loan may attract higher costs for this extra
benefit.
A redraw facility means you can put all
your ‘rainy day’money in your mortgage
knowing you can get it out again if needed.
You can also use it to save money for a specific
purpose such as a car. Competitively priced
loans with redraw facilities are increasingly
common, but you may still end up paying
more.
Redraw facilities often charge a fee for each
withdrawal, set a minimum amount for each
redraw and may limit the number of redraws
per year. Consider how often you are likely to
‘redraw’ your money before deciding whether
this feature suits you.
Using the redraw facility may impact on the
tax deductibility of your loan. Please discuss
this option with us, your mortgage specialist,
and your accountant.
TIPS FOR REPAYING YOUR MORTGAGE SOONER
