18 Ways to Reduce Your Mortgage Loan Part 1
Written by: Kevin Saunders
1. Skip the introductory rate (Honeymoon)
Beware of lenders bearing gifts! Introductory or honeymoon rates
have long been an important marketing tool for lenders. You are
initially offered a cheap rate on your loan to get you in the
door but once the honeymoon period is over, the lender will
switch you to a higher variable rate of interest. An example of
this is an Adjustable Rate Mortgage (ARM).
There are two problems with this scenario. First, the variable
rate is often higher than some of the lower basic loans
available so you could end up paying more. Second, you need to
clearly understand that a honeymoon rate applies only for the
first year or two of the loan and is a minor consideration
compared to the actual variable rate that will determine your
repayments over the next 20 or so years.
You may also be hit with fairly steep exit penalties if you want
to refinance in the first two or three years to a cheaper loan.
So make sure you fully understand what you are letting yourself
in before setting off on a "honeymoon" with your lender.
2. Pay it off quickly
Time is money. There are all sorts of strategies for paying less
interest on your loan, but most of them boil down to one thing:
Pay your loan off as fast as you can. For example, if take out a
loan of $300,000 at 6.5 per cent for 30 years, your repayment
will be about be about $1,896. This equates to a total repayment
of $682,632 over the term of your loan.
If you pay the loan out over 15 years rather than 30, your
monthly payment will be $2,613 a month (ouch!). But the total
amount you will repay over the term of the loan will be only
$470,397 - saving you a whopping $212,235
· Make repayments at a higher rate
A good way to get ahead of your mortgage commitments is to pay
it off as if you have a higher rate of interest. Get a loan at
the lowest interest rate you can and add 2 or 3 points to your
repayment amount. So if you have a loan at about 6.5 percent and
pay it off at 10 per cent, you won't even notice if rates go up.
Best of all, you'll be paying off your loan quicker and saving
yourself a packet.
· Make more frequent payments
The simple things in life are often the best. One of the
simplest and best strategies for reducing the term and cost of
your loan (and thus your exposure should interest rates rise) is
to make your repayment on a fortnightly (bi-weekly) rather than
monthly basis. How can this make a difference I hear you ask? It
works like this:
Split your monthly payment in two and pay every fortnight.
You'll hardly feel the difference in terms of your disposable
income, but it could make thousands of dollars and years
difference over the term of your loan. The reason for this is
that there are 26 fortnights in a year, but only 12 months.
Paying fortnightly (bi-weekly) means that you will be
effectively making 13 monthly payments every year. And this can
make a big difference.
Using our example from above, by paying monthly, you will end
uprepaying $682,632 over the term of your loan. But, by paying
fortnightly (bi-weekly), you will save $87,254 in interest and
5.8 years off the loan. Zero pain to you, major benefit to your
· Hit the principal early
Over the first few years of your mortgage, it may seem that you
are only paying interest and the principal isn't reducing at
all. Unfortunately, you're probably right, as this is one of the
unfortunate effects of compound interest. So you need to try
everything you can to get some of the principal repaid early and
you'll notice the difference.
Every dollar you put into your mortgage above your repayment
amount attacks the capital, which means down the track you'll be
paying interest on a smaller amount. Extra lump sums or regular
additional repayments will help you cut many years off the term
of your loan.
· Forego those minor luxuries
This is the bit you don't want to read. Once you have a
mortgage, your life is likely to be luxury-free (or at least
pretty close to it). Think of all the weight you will lose by
giving up your favourite indulgent snack. For the sake of your
health you should quit smoking and drink less anyway. Take your
lunch from home and save on bad fast food. Trust me, your body
will thank you for it.
If you're still not convinced consider the following example. A
typical day may include a pack of cigarettes ($10), a coffee and
donut ($5), lunch ($12) and a couple of beers after work ($8).
That's $35 a day or $175 a week or $750 a month or $9,100 a
Assuming a mortgage of $300,000 at 6.5 per cent over 30 years,
by making $750 in extra repayments each month, you'd save more
than $216,000 in interest and be mortgage free in just over 14.5
No one is saying you should live a convict existence but just
cutting down a little on your expenses will see you reap huge
3. Get a package
Speak to your lender about the financial packages they have on
offer. Common inclusions are discounted home insurance, fee-free
credit cards, a free consultation with a financial adviser or
even a fee-free transaction account. While these things may seem
small beer compared to what you are paying on your home loan,
every little bit counts and so you can use the little savings on
other financial services to turn them into big savings on your
There are also "professional" packages on offer for amounts over
a certain limit, which can be as little as $150,000. Some
lenders offer discounts to specific professional groups or
members of professional organizations. Ask your lender if your
occupation qualifies you for any discount. You might be
pleasantly surprised. There are all sorts of discounts and
reductions attached to these packages so make sure you ask your
lender about them.
4. Consolidate your debts
One of the best ways of ensuring you continue to pay off your
loan quickly is to protect yourself against interest rate rises.
If your home loan rate starts to rise, you can be absolutely
positive about one thing - your personal loan rate will rise and
so will your credit card rate and any hire purchase rate you may
happen to have.
This is not a good thing as the interest rates on your credit
cards and personal loans are much higher than the interest rate
on your home loan. Many lenders will allow you to consolidate -
re-finance - all of your debt under the umbrella of your home
loan. This means that instead of paying 15 to 20 per cent on
your credit card or personal loan, you can transfer these debts
to your home loan and pay it off at 7.32 per cent.
As always, any extra repayments or lump sums will benefit you in
the long run.
5. Split your loan
Many borrowers worry about interest rates and whether they will
go up but don't want to be tied down by a fixed loan. A good
compromise is a split loan, or combination loan as they are
often known, which allows you to take part of your loan as fixed
and part as variable. Essentially this allows you to hedge your
bets as to whether interest rates are going to rise and by how
If interest rates rise you will have the security of knowing
part of your loan is safely fixed and won't move. However, if
interest rates don't go up (or if they rise only slightly or
slowly) then you can use the flexibility of the variable portion
of your loan and pay that part off more quickly.
6. Make your mortgage your key financial product
Mortgage products known as all-in-one loans, revolving
line-of-credit or 100 percent offset loans allow you to use your
mortgage as your key financial product. This means you have one
account into which you can pay all of your income and draw from
for your living expenses by using a credit card, EFTPOS or a
checkbook, as well as making your mortgage repayments..
These types of accounts can make a huge difference to the speed
at which you pay off your loan. Because your whole pay goes into
your mortgage account you are reducing the principal on which
interest is charged. Sure, you might take a couple of steps back
as you withdraw living expenses but careful use of this sort of
product can get you thousands of dollars ahead of where you'd be
with a "plain vanilla, pay once a month" home loan.
These loans work well when you are able to make additional
payments towards the loan. If you are only able to make the
equivalent of the minimum repayment on your loan (and not put in
any extra) you may be better off with a cheaper standard
variable or basic variable loan. However, it's not unusual for
dedicated borrowers using these types of loans to cut the term
of a 30 year-old loan to less than ten.
7. Use your equity
If you have already paid off some of your home, you are said to
have equity. Equity is the difference between the current value
of your property and the amount you owe the lender. For example,
if you have a property worth $500,000 on which you owe $150,000,
you are said to have home equity of $350,000, which you can
re-borrow without having to go through the approval process by
accessing it through your existing loan.
Many lenders will allow you to borrow using your equity as
collateral. Most lenders will allow you to borrow up to about 80
per cent of the loan-to-value ratio (LVR) of your available
equity. If you are careful, you can use this equity to your
advantage and help to pay off your home loan sooner.
Using an equity loan to improve your property could be a good
way to ensure that your home increases in value over time. But
larger expenses such as cars and holidays that would have been
paid by credit card are more affordable on the lower rate of
your home loan.
8. Switch to a lender with a lower rate (But do your sums)
It may sound like a simple idea but switching out of your
current loan and taking out a loan at a lower rate can mean the
difference of years and thousands of dollars. If you have a loan
that is tricked up with all the features, or even if you have a
standard variable loan, you might find that you could get a no
frills rate that is as much as a percentage point cheaper than
your current loan.
However, before you jump the gun, check out what it will cost
you to switch loans. For example, there may be exit fees payable
on your old loan and establishment fees and stamp duty on your
new loan. Work it all out and if it makes sense, go for it.
About the author:
Kevin Saunders is one of the founders of MortgageLoanHints.com,
bringing you tips and hints for paying off your mortgage
quickly, helping you to use the power of a mortgage loan to
increase your wealth and learn to take control of your own
finances. You can see more of Kevin's articles here:
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