June 14, 2018
Imagine how much you could free up your finances if you reduce your mortgage repayments each month. Or what if you shrink your mortgage so much you pay it off a couple years earlier? You could have 20 or 30 extra months of your life without having to come up with a mortgage repayment! That means more money to pay off other debts, save, invest, or to use for yourself to travel or spend however you like.
The thing is, most homeowners don’t put a lot of thought into reducing mortgage repayments. You may make the effort to research a good loan, find a good rate, then apply for your mortgage.
And then, you probably take a “set it and forget it” approach like most borrowers, paying down your mortgage and not giving attention to the actual numbers except for when they change if you have a variable rate loan.
But, leaving your mortgage repayment amount as is could be a very expensive decision. This is one area of your finances you don’t want to take a passive approach to. By being proactive and starting your mortgage reduction strategies early on, you could save tens of thousands on your mortgage and enjoy a break on your monthly repayments.
Being able to reduce your monthly mortgage payments is more than just a good idea, it also makes a lot of financial good sense. After all, why pay more for your home than you need to? The good news is that there are several ways you can do this, and you may not even need to refinance your home loan.
One of the easiest ways to reduce your mortgage is to reduce the amount of interest you owe with a free offset account. With an offset account, you can reduce your mortgage repayment amount without having to spend a dime. An offset account is a feature you definitely want to look for if you refinance your home loan if you don’t have it already.
It works like this:
- Your offset account, which acts like a savings account, is linked to your mortgage account.
- You can deposit your savings into the account. You can also deposit your income straight into the account each month and then use your money as you need to for bill paying.
- When your interest is calculated for the month, the amount in your offset account offsets’ the amount you are charged interest on. For example, if you have $20,000 in your offset account and a $350,000 mortgage, you’ll be charged interest on only $330,000.
Over a 25 or 30-year mortgage, these interest reductions can really add up, helping you to get ahead on your mortgage with little effort on your part.
Another way to reduce your mortgage debt is to pay more each month. You’re not technically reducing your monthly repayment, but you are reducing the total amount you’ll pay. By doing so, you cut back on the amount of interest you will pay and you will also pay off your mortgage sooner.
Instead of paying $2,000 per month, you could raise your payment size to $2,100. Once you set up the habit of paying a little extra, it becomes a part of your budget, making it easier to pay down your debt faster.
As you get ahead of your mortgage, you’ll have the option of taking a mortgage repayment holiday. This is because when you pay extra, your lender will only bill you for the amount you’d owe to maintain the term of your loan. Remember, it’s in their interest for you to take your time paying down your mortgage. More time equals more interest for them.
It may be worth using an extra repayment calculator to see how much of a difference a little extra will make. To give you an idea: if you pay an extra $100 a month on your mortgage, after three years with a 25-year $300,000 mortgage with a 5% rate, you could save $19,218 in interest. Even better, you’d owe $0 dollars on your mortgage for the last 24 months because you could pay it off 2 whole years early.
If you are currently paying monthly, you could save more money by paying fortnightly or weekly. Instead of just making 12 full payments, you are making 26 half-payments, or 13 full payments a year with fortnightly payments. As a result, you end up paying a little more each year. Just like with an offset account or extra repayments, you end up reducing your interest quite a bit in the long-term and can pay off your mortgage earlier.
You can ask your lender to switch to more frequent payment amounts or set up fortnightly or weekly payments when you refinance.
If you can refinance to a loan with a lower rate, you’ll reduce your monthly repayment. Getting a better rate is one of the top reasons that Australians refinance. It helps you save each month and it can make it easier to pay down your loan faster as you pay less in interest.
Just keep in mind, you’ll have to pay refinancing costs, which can range from a few hundred dollars to much more if you have to pay lender’s mortgage insurance again, or if you have to pay break costs for a fixed rate loan or exit fees because you took your loan out before these fees were eliminated.
To make sure you’re saving money when you refinance, estimate how long it will take your monthly mortgage repayment savings to overtake the amount you spent to refinance your loan.
If you are having difficulty making your monthly mortgage payments now, you can ask your lender to extend your mortgage. This is also called re-casting, or sometimes re-amortizing. It is not the same thing as refinancing, and it will generally only cost between $200 to $300.
The goal is to lengthen the time you have to repay the home loan, such as extending it from 15 years to 20, or 30. While this will certainly lower your payments, you need to be aware that it will also increase your interest considerably over the length of the mortgage. After you do this, it is still a good idea to reduce your mortgage as soon as you are financially able.
By getting ahead of your loan, offsetting your mortgage and reducing your interest, refinancing or re-casting your mortgage, you can get your loan repayments down. You’ll need to take the strategy that works for you – for example, you may be in a position where you can pay more on your mortgage to reduce what you owe. At other times, you may need to lower your monthly repayments so you can catch up financially, and then, later on, you can work towards getting ahead and shrinking your interest owed.
The trick is to always look for ways to pay as much as you can so you can reduce your overall debt. Then, you won’t just enjoy a smaller mortgage. You’ll get the peace of mind of knowing you’re that much closer to being mortgage debt free.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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