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MORTGAGE REDUCTION STRATEGIES
The word Mortgage is actually a concatenation of two French words: the word Mort which means "death", and the word Gage which means "pledge". So in effect, a mortgage is a "death-pledge".
The banks will generally structure a home loan for a 25 or 30 year term. This allows them to maximise the interest payments they will receive from you. But it need not be this way.
Reducing the term, and the amount of interest you will pay over the life of your mortgage, is quite a straightforward process. By applying a few basic strategies, one can pay off one's home loan in half the mandated time or less, without making any additional repayments over and above those normally required. How is this possible?
The key principle of Mortgage Reduction is that "Interest is calculated on the daily balance". Therefore, the day-to-day balance of the mortgage account has a significant impact on the interest charged to the loan, and therefore the term of the loan.
There are four basic methods one can employ for Mortgage Reduction. You can use only one of these, or you can use a combination of several of these for maximum benefit. The first two do not require you to pay anymore than your standard repayment, and yet you can halve your loan period. If you don't use either method 1 or 2, then the third requires only a fractionally higher repayment, which you will hardly notice, and yet it will likely shave 6 years and $10's of thousands in interest off your home loan.
The 4 methods are:
The basis behind methods 1 and 2 is to restructure the funding of your property in order to minimise the interest which is charged to your loan.
If you're a little unfamiliar with the account types I mentioned for methods 1 and 2, see the article The Different Types of Home Loans.
Conclusion:
In conclusion, the most important element in all Mortgage Reduction strategies is YOU.
You can derive much benefit by using these methods, but you'll derive maximum benefit if you set targets, write out a plan and budget and monitor it monthly. Be discerning with your expenditure. We suggest using some budgeting software such as the Financial Advisor program as a basic example. This will also allow you to create and calculate your own mortgage amortisation schedule (as we have done for Heath & Melissa). Be disciplined - it'll be worth it.
Here are a few additional tips:
The banks will generally structure a home loan for a 25 or 30 year term. This allows them to maximise the interest payments they will receive from you. But it need not be this way.
Reducing the term, and the amount of interest you will pay over the life of your mortgage, is quite a straightforward process. By applying a few basic strategies, one can pay off one's home loan in half the mandated time or less, without making any additional repayments over and above those normally required. How is this possible?
The key principle of Mortgage Reduction is that "Interest is calculated on the daily balance". Therefore, the day-to-day balance of the mortgage account has a significant impact on the interest charged to the loan, and therefore the term of the loan.
There are four basic methods one can employ for Mortgage Reduction. You can use only one of these, or you can use a combination of several of these for maximum benefit. The first two do not require you to pay anymore than your standard repayment, and yet you can halve your loan period. If you don't use either method 1 or 2, then the third requires only a fractionally higher repayment, which you will hardly notice, and yet it will likely shave 6 years and $10's of thousands in interest off your home loan.
The 4 methods are:
- Use a 100% Offset Account
- Use a Home Equity Loan/Line of Credit
- Make Weekly or Fortnightly repayments instead of monthly
- Make extra payments when possible (i.e. tax return cheque / Christmas bonus)
The basis behind methods 1 and 2 is to restructure the funding of your property in order to minimise the interest which is charged to your loan.
If you're a little unfamiliar with the account types I mentioned for methods 1 and 2, see the article The Different Types of Home Loans.
Conclusion:
In conclusion, the most important element in all Mortgage Reduction strategies is YOU.
You can derive much benefit by using these methods, but you'll derive maximum benefit if you set targets, write out a plan and budget and monitor it monthly. Be discerning with your expenditure. We suggest using some budgeting software such as the Financial Advisor program as a basic example. This will also allow you to create and calculate your own mortgage amortisation schedule (as we have done for Heath & Melissa). Be disciplined - it'll be worth it.
Here are a few additional tips:
- When restructuring your finances, spend the time to do some research on interest rates and fees across many lenders. Check out the smaller lenders - you may be concerned about their long-term viability, but remember that it's you that will have their money not the other way around!
- Hidden charges, fees and restrictions usually counterbalance lower advertised interest rates: quite often the lowest interest rate is not the best or most efficient loan.
- Speak to your lender about what financial packages they have on offer. By consolidating your banking with one provider, you may be able to get a fee free home loan, offset account, and credit card, as well as discounted home and car insurance. Over a period of years, ploughing the savings you make into your mortgage could make quite a difference.
- If you think you might be moving, consider a "portable" home loan (such as most Home Equity Loans). You will thereby avoid some stamp duty, discharge costs and establishment fees when you move as you will be able to use the same loan.
- If you are self-employed or run a business in your own name and are able to, temporarily park the business cashflow in your Offset account or Home Equity Loan until it is needed. This could reduce your loan interest significantly.
- If you're a professional (teacher, dentist, etc..), look out for "professional" loan packages. You can get a discounted interest rate and bonuses just because the finance providers believe you have stable employment.
- Make sure your finances are structured correctly. Some money spent on good financial advice could well be worth it. For example, if you have investment property in addition to your own home, it's usually best to put the investment property on an "interest only loan" and plough the saved principal repayments into your "principal and interest" home loan. The interest on an investment property is tax deductible whereas the interest on your own home is not. Do all you can to pay off your non-deductible home loan first, and then look at reducing your tax deductible loans. If you're in the top tax bracket, the difference over time can be quite significant.
Tips and tricks for reducing the mortgage
- The bigger your deposit, the better your chances of negotiating a good deal.
- Negotiate all fees, such as establishment costs.
- Investigate the use of a revolving credit facility. This is when your regular income is credited directly against your mortgage as a form of repayment. However, only a part of your income will eventually be used as a mortgage repayment. As you require the use of the rest of your income for other needs, you can "draw down" on your revolving credit facility.
The benefit is that for a small window of opportunity, the balance of your mortgage is reduced and this, of course, reduces the interest payments. Used correctly, such a facility can potentially reduce interest payments over the term of your mortgage by thousands of dollars. Discuss the details and costs with your bank. - Pay off as much as you can afford. Increasing your repayments from as little as $10 each week can take years off your mortgage.
- Pay off the mortgage as fast as you can. Look at all options to speed up repayments, from making lump sum payments, to using your pay increase to reduce your debt.
- If a bank gives you an extra loan, it's good business for them, but not necessarily good for you. It's relatively easy to get a loan today, so think very carefully about adding to your mortgage, building that sun deck or extra room for example. You can only really start saving for the future once your mortgage is clear. An additional loan, no matter how small, can add years to the life of your mortgage.
- Apart from the interest rate, be aware of other costs, such as application and establishment fees.
- Be aware of the charges that may be incurred for lump sum and early repayments. This applies particularly to fixed interest loans. You may have to save the money in a separate bank account until you can transfer the sum to your mortgage without penalty.
- Begin arranging the loan at the start of the house-buying process. Your ability to negotiate is reduced when you've just found the home of your dreams.
- You don't have to have a mortgage with your own bank. There are many providers so shop around: "care where you invest, but not where you borrow."
Mortgage Reduction Specialists with purpose built software designed to reduce interest from a mortgage offset account, saving tens of thousands of dollars and cutting years from the loan term.
Download and complete the cfi_mortgage_application below and return to our email and we will do the rest. We can provide a mortgage reduction plan with a detailed and comprehensive break-down of your current spending habits and lifestyle and how it can effect your mortgage analysis. On acceptance we can assist with an indicative bank approval for a refinance bank loan with a new structure to suit your lifestyle which will include all fees. We also can provide other services like lease to own options for rental properties, property management, property profiling and marketing properties for sale and most of all an alternative funding source. 
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