Mortgage Reduction Strategies (4)

Method 4 – Make Additional Payments When Possible: taken from http://www.financiallyfree.com.au/mortgage_reduction.htm

When you begin paying off a mortgage, the first few year’s payments are predominantly made up of interest. In fact, in the first 14 years of a 25 yr P&I loan, you’ll be paying more interest with every payment you make than principal off the loan.

If you can pay a little extra to eat into the principal, then the difference can be significant.

Let’s look again at Heath and Melissa. They may be unable to take advantage of Methods 1 and 2 at present, but have chosen to make use of Method 3. However, they would still like to clear their loan faster than the 20yrs 8mths we came up with in the last example.

Every year in August, they receive a combined tax refund for about $2000, and they have chosen to put this directly towards their home loan every year until the loan is paid out. The table below shows the difference this will make:

	P&I Loan with Monthly repayments	P&I Loan, Fortnightly repayments + Annual ATO refund for $2000
Repayment Amount	$1032 p/mth	$516 p/fortnight + $2000 per annum
Time To Repay Mortgage	25 years	15yrs 10mths
Total Interest Payments to the Bank	$159,547	$93,130
Total Principal Payments Made	$150,000	$150,000
Total Repayments Made	$309,547	$243,130
Time Saved	Nil	9yrs 2mths
Interest Saved	Nil	$66,417

By combining methods 3 and 4, Heath and Melissa will now save $66,400 in interest and slash over 9 years off their loan.

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 Advisorprogram 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.

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