Opinion
It’s at 6.36 per cent interest – where most mortgages are now – that the price you initially paid for your home, doubles. Yes, the interest you outlay on a typical $400,000 mortgage is almost exactly $400,000, on $700,000 borrowed it’s $700,000 and on $1.5 million – you get it.
That’s over a 25-year loan term. And, crucially, it’s only if you let your loan term run for 25 years.
So, let’s look at your shortening strategies, at all the ways you can bring your mortgage-freedom date forward. Some of them are cheaper and easier than you think. We will start with the cheapest.
Use the offset potential properly: Very few people operate offset accounts to their full benefit. But let’s make sure you have a proper one first – because ASIC has lenders in its sights about this.
To take maximum advantage of an offset account attached to a mortgage, money you hold in the offset must reduce the loan balance by an equal amount. In other words, dollar for dollar.
Watch out, too, for offset accounts that don’t give you the same interest rate saving as your home loan. Many offsets attached to fixed-rate loans do not. But a quality offset account is a powerful thing.
Let’s say you scrounge every dollar you have to your name and put them in an offset account or accounts – note that housing money here will save you more than you will earn in a deposit account and those “returns” will be tax-free.
You hold $30,000 – your savings for everything, as well as your emergency fund – in an offset account against a $700,000 loan.
By simply redeploying money thus, you won’t pay $700,000 in interest but only $594,133 – so save more than $105,000 – and you will slash nearly two years off your time in debt. If it helps with motivation, realise that at a higher interest rate, those interest and time savings are bigger.
Up-level your offset Part of the reason I like credit cards – apart from an insatiable appetite for frequent flyer points! – is this strategy. But let me begin by saying you should use credit cards only if you can 100 per cent trust yourself with debt.
Just by shaving 36 basis points off your interest rate, you’ll go from paying $700,000 in loan interest to $653,033.
A credit card lets you get your salary paid into an offset account and sit there for an entire month. You take full advantage of the interest-free days on the credit card by paying off the balance in full on the statement due date.
What it means is that you use the bank’s money to save you mortgage interest.
How much difference could it make to the bottom line of a loan? Say your household makes $10,000 a month and you offset that as well as your $30,000 in savings against your $700,000 loan.
This will get you out of debt two years and five months early and boost your interest savings to $136,875. Your bill drops from $700,000 to $563,125. Again, that’s just by simply re-organising your finances.
Try the mortgage mind-tricks: You might have heard this strategy before but it works thanks to our Gregorian calendar. Think about it – there are 12 months in a year but 26 fortnights.
And that means a beautiful thing: if you simply halve your monthly required minimum mortgage payment and pay that amount fortnightly, you will come out a whole month ahead. It will only cost you a few dollars extra each fortnight but will get you ahead a massive amount.
On our model $700,000 mortgage, you go from paying $700,000 in interest to $564,546, a saving of $134,262. You will be paying $2333 instead of each fortnight $2152, but the impact – wow!
And is your minimum repayment a weird number? It’s usually so. Consider making it a nice neat one on the higher side. The effect of a round-up will be similar to the above. But this next technique is the mic-drop mortgage-busting moment … all it requires is a renegotiation or refinancing.
Up stumps but still stump up: While an average mortgage is now in that 6.36 per cent “double-trouble” zone, the best are still down around 6 per cent.
And as always, we are talking about quality, comparable loans to the big four banks – ones that are backed by authorised deposit-taking institutions so can both offer real offset accounts and also have the protection of the government’s $250,000 deposit guarantee if an institution goes bust.
What are we talking in savings here? Just by shaving 36 basis points off your interest rate, you’ll go from paying $700,000 in loan interest to $653,033.
Don’t miss that this hasn’t cost you even a dollar extra – but if you “up stumps but still stump up”, as I call it, your savings go stratospheric.
Move mortgage (or negotiate a discount) and simply keep your repayments the same, and you’ll save $102,480 and shave 1½ years off your time in debt. That total outlay is just $597,520. Given you are used to paying that amount already, all that early repayment power is no extra pain to your pocket (in reality you will be suddenly overpaying by $155).
And just imagine if did all of the above. You’d stack savings upon savings and entirely avoid the horrible possibility we’ve just hit: mortgage price doubling.
Nicole Pedersen-McKinnon is author of How to Get Mortgage-Free Like Me, available at nicolessmartmoney.com. Follow her on Facebook, X and Instagram.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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