I feel very fortunate to have paid off my last mortgage in seven years, saving roughly $200,000 in interest.
I am in the process of getting a new one – that’s another story – and rates that have risen rapidly mean lowering interest is a huge priority for us all.
Well, I want to share three strategies that I have personally proven accomplish this for ‘free’.
Or, at least, for no additional pain to my pocket.
Read more from Nicole Pedersen-McKinnon:
These are the free kicks to kick debt… and get yourself out of harm’s way of the Reserve Bank.
Free kick 1: Use every dollar twice
As unlikely as this sounds, it’s possible. And you need an offset account to do it.
This magic little Aussie invention is quite simply a savings account that is hooked to your home loan.
Instead of earning interest on the money you hold in it, like you would in a standard savings account, you save interest on that amount of your home loan.
So, better still, that saving is tax-free.
Where does the ‘use-every-dollar-twice’ bit come in? If you house in an offset the money you are stashing for your next holiday, couch, car or cat, as well as what I call your Holy Sh*t (or emergency money), it can slash the cost of (and your time in) debt too.
By how much?
Potential saving: We will assume you have a $400,000 home loan at a fairly typical mortgage interest rate of 5 per cent. Let’s also base our example on $30,000 of cash stashed for all of the above in your offset account.
You would save almost $66,000 and shave 2.5 years off your loan term. For no extra repayments.
Free kick 2: Deploy the bank’s money to save you more
One of the techniques that was most effective in helping me ditch my debt in seven years was to use the bank’s money for free.
It’s possible to put your entire salary (or salaries) in an offset account attached to your mortgage, along with the above cash stashes, by putting all your expenses on a credit card with a long interest-free period.
Remember, provided you clear a card in full each month, you get access to that money at no cost.
So, to make this clever mortgage-busting trick work, all you need do is shift the money out of your offset and onto your card just as the bill is due.
And hey presto, your loan is lower by whatever your income is… the whole time.
The key to making this savviest of strategies work is to not flash the plastic for a cent more than you otherwise would. You are trying to save, not spend.
An added bonus of flushing all your finances through a credit card could be reward points but your interest bottom line is saving.
Possible saving: Let’s say, again, you have a 5 per cent, $400,000 mortgage and your household also clears $10,000 in income a month.
You will add a further $18,668 to your $66,000 previous saving… to take your total to $85,000.
What’s more, you will shorten your home loan by three whole years.
Once more, for no extra outlay.
Free kick 3: Win in the mortgage price war
Last month I revealed here on Yahoo Finance that there is a behind-closed-door mortgage price war.
Lenders are so desperate to keep their ‘loan books’ high as mortgage customers in their droves abandon expensive products, that they are giving secret discounts of as much as 2.41 percentage points.
You may even save the bother of having to refinance and get this from your existing lender, if they are keen enough to keep you.
But the real debt-busting power of a discount is if you – my phrase again – “up stumps but still stump up”.
In other words, get one of these crazy-good deals but then keep your repayments the same.
Yes, you will be paying extra. But you will be paying no more than what you are already paying.
And what you stand to gain from what is really the mortgage-busting masterstroke is enormous.
Possible saving: Say you slash the interest rate on our model $400,000 mortgage from a typical big bank advertised rate today of 6 per cent to the best-in-market: 3.59 per cent (this is a quality loan not a cheap-and-cheerful one that, of course, comes with an offset account – Google it).
Because you are canny with debt, you also keep your repayments at the $2,577 they have always been – which now represents a $555 overpayment.
Your overall interest bill will positively plummet, to $138,556, from $373,162.
That’s almost $235,000 you keep from a lender and for yourself.
You can see your own potential savings in not just money but, crucially, time, on my free app My Mortgage Freedom Date.
But on these numbers, in what really is a mortgage-busting masterstroke, you get debt-free more than seven years early.