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Posted in Choosing the Right Loan on 6 Aug 2018
A home loan can be a bittersweet entity.
On one hand it means that you have reached that point in your life. It is a testament to the hard work you have put in, and everything that came before.
But on the other hand, it means years – possibly decades – of a financial obligation to a bank or other lender.
There are several ways you can change that. With some smart banking and financial awareness, it is perfectly feasible to pay off a home loan with tremendous speed, allowing you to enjoy the freedom of your own residence sooner. This can also allow you to put money away and possibly explore your investment opportunities as well.
The speed with which you can pay a loan off is often determined by what happens before your loan is even taken out.
Your preparation is paramount in making sure that you get not only the best deal, but a loan that works for you as an individual, your financial situation, and your financial goals.
Many first-time homeowners take out a loan prioritising interest rates and little else. It is a common mistake, and one that (depending on the lender) may not be so easy to rectify.
What will follow in this section are a number of things to do before taking out your loan that will help you drastically reduce the amount of time you spend paying off said loan.
It might sound obvious, but you would be surprised by how many people (as stated above) just look for a home loan with the lowest interest rate. It doesn’t take much research to show that interest rates, while important, are far from the crux of what you want to make your home loan decision on.
Rather, you should look at features and benefits of certain banks. If you’re a financially-minded person, you might want to look at if your lender charges fees for changing banks or tenures during the tenure of your loan.
Shopping around consists of monitoring your own personal expenses. Creating a budget, planning for emergencies, seeing what the highest feasibly possible amount you could pay off monthly (or sooner) is, and then seeing what banks/lenders seem to have the most experience with people in your financial situation. Also, find out what the fees are of any expert mortgage brokers, legal representation, accountants, etc, are while budgeting. These details will be dealt with later.
So, after you have scoured the internet and settled on a bank or lender, then what? The next step in securing a home loan you can pay off quickly comes in the form of a term you might see a lot while shopping around.
While it conjures up images of romance, sunsets, beaches, and calm oceans, with sweet drinks and comfortable weather, a loan with honeymoon rates is anything far from romantic or idyllic.
A Honeymoon Rate is a system whereby the borrower is given a low interest rate for a fixed period of time. This rate is often attractive to first-time borrowers or homeowners and is designed to prey on their ignorance.
The low interest rate may be attractive to first timers because it’s low and this often creates the illusion that it is a repayment that can be “eased into”. However, after the period of the honeymoon rate has ended, borrowers who have opted into this scheme find themselves stuck with a huge interest rate that they are only just prepared for.
It is important to note that Honeymoon rates aren’t all that bad, it merely comes down to experience. For an experienced borrower, or someone with an income that allows for excess payments, the honeymoon period could prove quite beneficial. However, for most borrowers, particularly first-time homeowners, these rates are more honeypot than honeymoon.
Your credit score is an integral part of securing your loan. The very concept of a loan is that a bank puts their money on the line to help you realise your vision of the future you want to live. They bet their money that you are financially stable, responsible, and hardworking enough to make that vision a reality while they don’t end up out of pocket.
For this reason, you need to make yourself appear like a decent risk. Your credit score is a huge indicator of what kind of risk you are, and based on it, you can get certain benefits on your home loan.
People with a high credit score typically get lower interest rates, which isn’t insignificant. While not the most important factor, interest rates are still relatively important entities, and if you’re looking to pay off your mortgage as soon as possible, a low interest rate can help make that dream a reality.
If, after checking your credit score, you find that it’s not great, don’t worry! There are a variety of ways to improve your credit score in a matter of months, including paying your bills on time, not applying for new credit, paying outstanding loans and debts (before the due date if possible), keeping the balance on your credit card low, and holding onto accounts with good repayment records.
There are many loan options to choose from, and pretty much every single one can be beneficial to one financial situation or another. However, if you’re looking to pay off your mortgage with considerable speed, a Variable Rate Loan should be the loan you consider.
Variable Rate Loans are so named because the amount of interest you pay on them depends largely on the ever fluctuating worth of cash, and therefore the worth of your interest rate. One month your interest rate may be low; the next month it could be higher than you anticipated, or lower!
While it may sound unattractive and a huge risk, with some careful planning and saving a Variable Rate Loan is actually attractive to the homeowner seeking to pay off their mortgage quicker for two main reasons, one of which we will go into more detail on later. For now, suffice to say that a Variable Rate Loan has facilities in place to allow you to pay more than what you owe on your repayments.
This means that even if your repayment is $500 a month during that particular month, if you have the means you could pay $600 for that period. This is a constant feature. Regardless of how the market is, you can choose to pay more than your rate asks for. Not only will this give you a gleaming credit score, but you will be able to reach your principal (the amount that you borrowed without interest) faster.
Remember how the Variable Rate Loan was attractive for two reasons? Well this is the second.
An Offset Account is an account that you put money into, and the interest on your home loan is offset against the money in your Offset account.
Say your outstanding mortgage balance is $200,000 and your interest rate is 4.5%. Your Offset Account balance is $30,000. The benefit of the Offset Account is that rather than paying interest on the balance of $200,000, you will only pay interest on the balance of $170,000 as set out below.
$200,000 x 4.5% = $9,000 per year
$170,000 x 4.5% = $7,650 per year
The saving over a 12 month period would be $1,350.
If you had your $30,000 in a Term Deposit, you would earn around 3.0%, which equates to $900 per year. You would have to then declare this as income on your tax return and pay tax at your marginal rate.
The maths speaks out: $1,350 savings post tax v $900 pre tax.
In the first point of this article, we spoke briefly about budgeting and mentioned that it is a good idea to factor in account, legal representation, and broker fees into the equation. Well, here’s why:
Many expert mortgage brokers and specialist mortgage lenders can make you an offer to put these fees into the loan. While from an organisational point of view (debt consolidation), this might sound like a godsend, the additional interest can really bog you down in the long run.
It is best to prepare and prepare rigorously. Make these payments in full and up front and you can forget about them and worry only about paying off the interest on your home, not for the services you took advantage of while buying it.
So, now we’ve taken out our loan, we’ve paid everyone involved for their services, we’ve got a variable rate with an offset account, and we’re living comfortably in our new abode. Now what? Well, now comes the easy part – repaying the loan. Fortunately, we’ve set ourselves up for fast and easy repayments that will drastically cut short the amount of money that goes into someone else’s pocket! So, let’s get started.
Imagine your mortgage as a water tank. This water tank is connected to a planting box and needs to be refilled regularly so that the flowers in the box can grow and blossom. Every month you fill the water, and every month the flowers drink from the tank. Every now and then, however, it rains heavily, or you have rationed water more carefully then you planned to. So, the next month you don’t need to fill as much and can keep a little extra water for yourself.
This is, more or less, how mortgage repayments work. Your mortgage is there because you made an investment in your future, but ultimately it is money that’s borrowed. In order to fully realise the future you had in mind when you took out the mortgage, you need to pay it off, ideally as fast as possible.
So, why wait until the due date to pay? Unless you have a financial situation where you need to stick to the due date, any extra money should be put towards your mortgage. The more money that is put into your mortgage more frequently, the faster it will no longer become a burden to you.
This really goes hand-in-hand with paying before the due date. If you pay more money on your mortgage, then it stands to reason that the amount you owe will decrease quicker. Couple this with frequent repayments and your mortgage will be down in no time at all!
Just remember that it is important to not stretch yourself too thin. Obviously, the cost of living comes before paying extras, but if you have some additional funds that you are not going to need, you may as well put that towards your mortgage repayments.
We’ve spoken a lot about “extra money” in this section, but where does this extra money come from? Believe it or not, daily living.
Our small habitual expenses can actually contribute a huge amount of money towards paying off a mortgage. A survey by the ABS in October 2017 found that most adults under 34 are spending $100 per week eating out or ordering takeaway. That is a whopping $5,200 per year that could be going towards mortgage repayments!
Obviously, we shouldn’t sacrifice enjoyment of life to our mortgage, and sometimes when friends come over or we go out to enjoy ourselves eating out is a nice experience.
But if it’s simply to save time cooking, that is money that could have been better spent being put towards the mortgage and letting go of that financial restraint much earlier.
Staying aware of your expenses can be a hassle, but with mortgages it can be the straw that breaks the camel’s back.
If you want to pay off your mortgage quickly, it is important to remain aware of the market. Every month check out what is going on with your national currency, to see if it’s rising or falling. Try to predict the patterns and prepare accordingly, but most importantly, checking this information could tell you whether or not it is time to refinance.
The refinancing process is when a business or person assesses the interest rate, payment schedule, and terms of a mortgage agreement. This can happen for a variety of reasons, but it is a good opportunity to look out for, because it means that you can switch to a more competitive deal.
There will likely be an additional cost for refinancing your loan, and there will definitely be an expense if you decide to switch lenders altogether. However, sometimes this can lead to you getting a better deal, which can shave years off your mortgage.
Ultimately before seeking out a refinance, you definitely want to speak to a qualified mortgage advisor. They might see a trend you missed or some other detail that any layman would not know to look for. However, when it comes down to it, the cost of a mortgage advisor and the process of refinancing is more often than not a case of “you have to spend money to make money”.
If you are interested in pursuing a home loan, or just getting some credit advice, Guardian National Mortgage can help! Simply contact us using our contact page here or call us on 1300 LOAN STAR or email at