Owning a home can be incredibly rewarding, but it also comes with a fair amount of financial responsibility. In most cases, this responsibility stretches out over 30 years, sometimes even more, and the regular payments can put pressure on household budgets. Stories about people who pay off sizeable home loans in record time are always talked about – but what are some of the tricks to making this happen? Well, here are some tips to growth-hack your way to mortgage freedom.
1. Go hard at the principle from day zero
Good habits are crucial. Borrowers need to get into the right habits early and then stick to them. Scrimp and save as much as possible to get the principle down early – and make extra payments often. It's the early years that hurt the most in any home loan repayment schedule – and it demands a disciplined approach. Forget the overseas holidays for a while and the fancy nights out. Budget carefully and plan ahead. Try to make one to two ad hoc additional repayments every quarter. It will make a big difference. It should be no real surprise that the number one key to paying a home loan off faster is to make additional contributions.
2. Don't make 'true weekly' repayments
Make sure repayments are not 'true weekly'. Some lenders calculate 'true weekly' repayments by multiplying the monthly repayment amount by 12 and then dividing it by 52. The key is to get the lender to simply divide the monthly repayment amount by four instead. Because some months contain close to five weeks, this calculation adds the equivalent of a whole extra month's payment over the course of the year. So, the equivalent of 13 monthly repayments are made, instead of just 12. It may sound surprising, but paying this way can cut tens of thousands of dollars in interest off the loan.
3. Think about a split loan
A home loan option split between variable and fixed rates often provides borrowers with the best of both worlds at the same time. The variable portion provides the freedom to make extra repayments without penalty, while the fixed portion provides certainty about what repayments will be each week. It's often a happy and convenient compromise after weighing up the pros and cons of fixed and variable rates. How the facility is split is entirely up to personal preference.
4. Run an offset account
An offset account is a separate transaction account linked directly to the mortgage. It runs as a regular account providing access to the funds it holds, however the credit balance on the account offsets the interest charged on the home loan. This is also a popular option for investors looking to reduce the interest they are charged without affecting the tax deductibility benefits of their investment debt. Of course, investors should always seek independent financial advice on these matters.
5. Look beyond the big banks
There are more than four home mortgage lenders in Australia. The rates and features that lenders offer vary greatly. So when it comes to finding the best loan, don't think there are only four options. Whether you are a first time borrower, an existing customer of a big bank, or a seasoned property investor, it is worth exploring the different home loan options available on the market. Potentially the best product may be from a lender you haven't heard of before and that is where the services of a mortgage broker can be invaluable.
Heidi Armstrong is Head of Consumer Advocacy at non-bank lender Liberty.