Tired of that 25 or even 30-year home loan hanging over your head? Want to pay off your non-deductible debt as soon as possible? Well, the good news is it’s not impossible. There are a number of tricks you can play to get the job done faster.
It also requires a bit of diligence and focus. Financial planner and director at Neville Ward Advice, Andrew Reeve-Parker, has a number of clients who have managed to pay off their home loans in record time.
“Yes, we have a large percentage [who can do that], mainly because we deal with clients who have a high disposable income,” he says.
There are a couple of things you can do before you start budgeting better. They include making sure you have a decent deposit before you buy. The more you save, the less you need to borrow.
Rob King is national manager of sales at ME Bank and suggests that all people who are eligible use the First Home Saver Account offered by many banks. It carries a competitive rate of interest and the government will contribute 17 per cent of the first $6000 saved each year. This means if you put in just $100 a week you could have $27,000 saved in four years.
“It’s a really good product, it’s just not known in the market,” King says.
Make your first repayment as soon as you settle on your home loan if you are just taking it out. This will come directly off the principal and could save you almost $9000 in interest and shave five months off the $400,000 home loan we use in our budget example for Jane and John.
If you can, pay fortnightly. But don’t pay the fortnightly amount as set by your bank. Split the monthly amount in two and pay that off every two weeks. You will get in two extra payments a year and save more than $86,000 in interest and shave four years and three months off your home loan.
“In practical terms you can save a lot of money on your mortgage – a lot of our customers are on fortnightly pay cycles,” King says.
Also don’t cut back your repayments when interest rates drop, and use the offset feature. Use your credit card, with a long interest-free period, for daily purchases while having your salary go into your offset account. The amount in your offset account effectively comes off your loan balance when it comes to calculating interest owed. But don’t fall behind in your credit card payments as that interest rate is so much worse.
It’s now much easier to refinance your home loan with the removal of exit fees, so, if you don’t think you’re getting the best deal, shop around. Our two scenarios for our mock couple, Sam and Sarah, in our tables are on rates of 6.75 per cent and 5.82 per cent. The higher rate is closer to what you would get with the major banks, the lower rate to what some smaller operators and credit unions are offering. But the end result is more than $69,000 savings for the duration of your loan.
“Most people end up refinancing,” King says.
Reeve-Parker says a strategy that some of their clients use is to get a flatmate. “One of our most powerful ones is for someone to buy, say, a three-bedroom apartment or a house, and get someone they are comfortable living with to come in and help repay off their home loan,” he says.
Not everybody wants to live with somebody after their early 20s, but if you’re motivated it’s a great way to pay down the mortgage.
If you want to pay off your home loan sooner you will need to tighten your belt and prioritise. Which is more important – being debt free in six years or having an overseas holiday every year? It’s all relative.
Reeve-Parker says many singles are more focused on having a good time rather than the long term, but if you are focused you should take advantage of your double income for as long as you can.
“If you have double income pre-children, what you can find is you can live off one wage while using the second wage to pay down the home loan,” he says.
Sound impossible? Think again. If you look at our two budgets above you can see what a difference a bit of budgeting can make. For a couple on two good incomes, pre-children, it could be possible to pay off a $400,000 home loan in fewer than six years, which would set them up extremely well for when the children do come along. All that home equity will come in handy if that new family addition prompts an upgrade.