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Five tips on how to pay your mortgage faster

There is a lot of noise in the media at the moment about rising interest rates and the impact they will have on mortgage holders who at the same time are also dealing with record levels of inflation and real wage declines. With rising price of fuel, electricity, gas and iceberg lettuce to name a few it can feel that it is hard to stay afloat.

Whether it is borrowing money to purchase your first home, dream home or an investment property,
it is vital to understand the inner workings of the banking world

so you are armed with the information to make the best decision for your personal circumstances. With the average Australian mortgage now $620,000, paying any more interest then you have to adds a significant cost to your budget and can add years to the length of time it will take to pay the loan back.

Recently I made a post on Linkedin regarding rising interest rates and a few quick tips in order to reduce your repayments whilst interest rates are going up. I received a number of messages regarding these tips and since the Reserve Bank of Australia has raised the official cash rate up another 1% since, I thought I would expand further on these tips and focus on how to actually pay your loans down faster.

Call your bank and ask for a better interest rate

Arguably, the best bang for your buck will be calling your existing lender and asking for a better deal. If you are the average Australian with the average mortgage and you can get a reduction of 0.5% on your current loan then that’s $3,100 saved interest every year. Not a bad return on investment for your time.

For this to work effectively you need to do your own research and compare your rate to other options in the market. Don’t be afraid to name the competitor and the rate and see if it can be matched. Interest rates are often priced based on the loan to value ration so if they ask how much your home is worth make sure you over estimate the value which reduces your Loan to Value ratio (LVR).

Review and consolidate your debt
If you have credit cards, car loans and personal loans- it may be a good time to consider consolidating into one loan on a lower rate. These types of consumer loans often have rates exceeding 20% and can burn a hole in your budget before you even sit down to prepare one. Consider consolidating via cash out against your home to reduce the interest but ensure that you set a plan to make above the minimum repayments to pay the new loan off faster.
Consider an offset account

An offset account is a savings or transaction account linked to your mortgage. Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.

For example, for a $620,000 mortgage, if you have $100,000 in an offset account means you’re only charged interest on $520,000. The contracted loan repayments will stay the same and so each repayment you make this reduces the principle further because you are being charged less interest.

If your offset balance is always low (for example under $10,000), it may not be worth paying for this feature so ensure you enquire to see if there are any additional charges for an offset account.

If you don’t have an offset then switch to more regular repayments

Interest is calculated daily but charged monthly, if you’re currently paying monthly repayments consider switching to more regular fortnightly repayments. By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights) and be charged less interest through the same period.

Depending on your loan type and structure you may be able to make additional repayments on top of the contracted minimum. For example, if you receive a tax refund then dump this into the loan rather than your savings account.
Find a better interest rate
Work with a professional and find a lender who wants you as a client. Work out what features of your current loan you want to keep and what features you don’t need anymore. If you don’t need the bells and whistles then often a “basic” loan will provide what you need for less costs. If you decide to switch to another lender, make sure the benefits outweigh any fees you’ll pay for closing your current loan and applying for another.
Lastly, try not to default to the standard 25 or 30 years loan term if you choose to refinance. The shorter the loan, the less interest you’ll pay. Make sure you refinance with the number of years you have left on your existing loan or less if you can afford.

Feel free to contact Rory or one of the team at Navigate Financial Group who are here to support your financial decision making, leading you confidently into your financial future.

Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.