How to secure a mortgage-free lifestyle sooner
Buying your first home can be both exciting and overwhelming – especially once the first mortgage bill comes through. However, for many buyers, the purchase of a property can be one of the most rewarding and valuable investments of their lives. If you've just bought your first property and are feeling nervous about the 20-30 year tenure of mortgage payments, we've compiled a simple guide with some tips that could help you to pay down your mortgage debt faster.
From negotiating new home loan rates to using an offset account or using savvy budgeting techniques, here are 23 ways you could secure a mortgage-free lifestyle sooner.
1. Purchase a home you can afford
Look to purchase a home you can afford, as often you'll be required to attain prequalification first. Prequalification means your bank will investigate your financial circumstances and determine the loan that is most suitable for you.
Some questions to help determine whether you’re eligible or ready to take on a home loan are:
- Will you be debt-free for three to six months?
- Are you able to provide a 5%-20% down payment?
- Can you afford to take out a 15-30 year fixed-rate loan?
- Is the home repayment 25% less than monthly take-home pay?
- Are you financially able to cover the fee moving expenses and leaving your current residence?
- Can you afford the ongoing maintenance and utility bills for this home?
- Do you have enough funds saved for any emergencies?
2. Consider refinancing your home loan
Renegotiating your current home loan rate with your mortgage lender, or shifting your home loan to a lender who offers a lower interest rate, may result in cost savings and could help reduce the tenure of your mortgage.
3. Consider an offset account
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An offset account is a savings or transaction account linked to a home loan account. The balance of the account is “offset” daily against the home loan balance, and therefore you are only charged interest on the difference between the total loan balance and the amount offset.
The money held within an offset account is not regarded as taxable income, as the account does not generate interest, which is beneficial for people who deposit large sums of money into the account.
Depositing money into the offset account with extra income from other sources of income such as bonuses and profits from investment can also help lower your interest repayments, as well as contribute to paying off your mortgage sooner.
Depending on the lender the money within the offset account also can be withdrawn twice or more in a year with some lenders charging up to $50 per withdrawal.
4. Consider refinancing your home loan
Renegotiating your current home loan rate with your mortgage lender, or shifting your home loan to a lender who offers a lower interest rate, may result in cost savings and could help reduce the tenure of your mortgage.
4. Keep your credit card debts manageable
Aim to clear your credit card of debt each month, as the interest rates on your credit cards and personal loans are often much higher than the interest rate on your home loan. When you pay on time, you avoid paying extra interest or late fees and also help keep your credit score healthy.
Personal Loan: A personal loan sits between a home loan and a credit card loan, and provides a faster and easier process than taking out a mortgage. Unlike a credit card loan, to access the personal loan, you are also required to sign a formal contract.
Credit Card Rate: A credit card's interest rate is the price you pay for borrowing money. The interest rates, known as the annual percentage rate (APR) are stated as a yearly rate. With a credit card, paying interest on purchases can be avoided if the balance is paid in full each month by the due date.
Hire Purchase: Hire purchase is an arrangement for buying expensive consumer goods, in which the buyer provides an initial down payment and pays the balance plus interest in instalments. Hire purchase agreements state that the ownership of the merchandise is not officially transferred to the buyer until all the payments have been made.
5. Split your loan
You may choose to split your loan in half, with a portion fixed, and the rest variable.
A fixed-rate home loan ensures your loan repayments are charged at the same interest rate for the length of your loan period. If the loan is not repaid by the end of the period and you choose not to enter another fixed-term contract, the rate is reverted to a variable interest rate.
A variable interest rate is a loan where the interest rate charged on the outstanding balance fluctuates as market interest rates change.
To successfully split your loan in half you can contribute through fortnightly payments, a method which gives homeowners a sense of security as fixed payments will remain constant while variable payments will see interest rates rise and fall.
6. Make repayments at a higher rate
People that choose a loan which is set at the lowest interest rate available can add 2-3 points to the repayment amount. For some, this may not make a drastic difference to their bank balance.
A good idea could be to align repayments with your pay cycle, prior to setting the amount you wish to repay each month.
7. Research into smaller lenders as well as big banks
There was a period in 2019 where homeowners were turning away from four major banks [in Australia] in favour of smaller lenders, as they provided more competitive rates.
Small lenders have been found to sometimes compete more persistently for your business and provide more personalised service. These companies may also offer home loan options such as longer loan terms, lower ongoing fees and lower interest rates.
8. Switch lenders
Finding a home loan at a lower rate can help you save money. However, always make sure to do your research before switching lenders or loans types. Always make sure to understand the rates and features of the loan, and don't be afraid to tell lenders the exact portion of your income you're prepared to allocate to mortgage repayments.
9. Find a package deal
Package deals or package home loans combine home loans and financial products, which can provide fee waivers for a transaction or offset accounts. Sometimes banks may waive annual credit card fees, provide discounts on insurance, discounted or free financial planning sessions and even discounted share trading.
10. Watch out for lenders who offer gifts
Introductory rates are commonly referred to as ‘honeymoon rates’, as lenders can try to convince homeowners to select a lower rate for a period of 1-2 years. Although once the honeymoon period has ended or the lender switches to a high variable rate of interest, the person is expected to pay for a much larger rate over the next 20 years.
Some lenders may also charge costly cancellation penalties for those who opt-out after utilising the honeymoon rates. Don’t be afraid to discontinue business with a lender who is no longer giving you the best service available.
11. Portable loans can make moving house easier
The average home loan is between 25 to 30 years, which is why it is quite common for people to move house whilst still paying off a loan. If you decide to move houses, a portable loan on your existing house that carries to your new property, can save you the inconvenience of refinancing. However, you should be aware of the regulations around buying and selling homes, as there may be additional charges for the old house and the establishment for the new house.
12. Pay all your mortgage fees and the charges upfront
When paying your mortgage fees upfront, it is sensible to pay with the money you already have, rather than borrowing money from the lender to pay fees and charges.
13. Pay your first instalment before it's due
The first instalment of your home loan may not be due for a month after the settlement. If your lender allows, you may be able to pay your first instalment on the settlement date, which can secure your position ahead of the lender for the term of your loan.
14. Pay off the principal
Every mortgage repayment you make attacks the capital which helps you pay a smaller amount of interest. You may want to avoid interest-only loans, as paying interest on your loan for a set period may result in the principal amount being charged at a higher propensity interest-only period.
15. Use your equity
Equity is the difference between the current value of your property and the amount you owe the lender. If you have already paid a percentage of your home loan, then you would have equity. Some lenders will allow you to borrow money using your equity as collateral. Using equity to improve your property also helps increase its value in the long run.
16. Discover what you could be entitled to
Some lenders may offer discounts and special conditions to those from specific professions, such as certified medical professionals. In these cases, a lender may waive or lend at a higher loan to value ratio before charging a Lenders Mortgage Insurance, which may provide you with a significant head start on paying off your loan.
17. Keep ahead of the game
Check the status of your home loan each year, as well as new home loan offers that you could be applicable for. Keeping yourself knowledgeable about this will help you to maintain a competitive mortgage rate, and avoid overpaying interest.
18. Budget
When trying to save money, a budget is a good way to organise your finances, balancing your home loan repayments as well as household bills. This will also help determine how much disposable income you have left over.
19. Know how much you’re spending on luxury items
Keep a budget so that you can identify what you spend most of your earnings on. Perhaps limiting dining at a restaurant or cafe to once a week, and instead, cook meals at home. Reducing your power usage, changing energy providers and upgrading your old appliances can be a great way to ensure your home is more energy-efficient, which will also result in lower power bills. Avoid purchasing low-quality items that are likely to need replacing. For more tips on how to save money, check our article about how you can save for a house deposit in a year.
20. Using gifted money towards your loan
If you receive any bonuses at work, cash gifts or inheritance and you’ve opted for a variable interest rate, then you could consider allocating a portion of the amount for your mortgage payments.
21. Rent out your home/spare rooms on Airbnb
Listing your home on Airbnb can be a great way to bring in some extra funds. Money earned from listing your home can also be put towards your loan repayment. Listing your home while you're away is also a great way to ensure your home is always occupied.
22. Use your tax refund
Your tax refund can be a great way to make a bulk payment on your home loan. For those that choose to lease their home, the ongoing rental property cost may be tax-deductible.
23. Seek additional work
Working a second job if possible, is a great way to save money quickly. Look for work with flexible hours, or casual opportunities that will fit around your schedule.