2020 starkly – in some cases stressfully – showed us just how valuable is a fully-paid-off roof over our heads.
It means no matter what happens to your job (and health), you have a home to live in... and all you need then is enough money to live on.
But too many people believe the only way to repay a mortgage early is hard, expensive slog.
They don’t realise there are four ways to – almost at no cost – get debt-free more than 10 years early.
Step 1: Up stumps but still stump up
Thanks to the coronavirus shutdowns and temporary home loan slowdown, there is an interest rate war going on out there.
Yes, you can get a discount of an average 92 basis points from an existing Big 4 lender right now, says data house Mozo, from an average advertised variable rate of 4.51 per cent to a discounted rate of 3.6 per cent.
However, not only will you have to be on a home-loan package and pay a steep annual fee of usually $300, but this rate won't come close to the new cheapest loans anyway.
Today, you can get a quality loan – importantly not a cheap and cheerful one – for just a little more than 2 per cent.
And your interest rate is everything when it comes to repaying a home loan for less.
But the genius strategy is to what I call ‘Up stumps but still stump up’. So, you switch to the best deal and simply keep your repayments the same.
On a loan of $400,000, if you move from one of the Big 4 Banks’ 3.6 per cent discounted rates to the best 2 per cent rate, but don’t ‘move’ the amount of your repayment, this would save you more than $120,000 and cut five years off your home loan.
And remember, that’s not cost you a cent more than you’re used to paying. So it’s like a free kick to kick debt.
Step 2: Get the debt-busting secret weapon
Offset accounts are a magic little Aussie invention that let you use every dollar twice, both for its intended purpose and to save you lots of lovely loan interest.
If you sit $30,000 against, again, a $400,000 loan, this time at a more average long-term rate of 5 per cent, you’ll save a further $66,000… and shave another 2.5 years off your loan.
Now you might be thinking: “I don’t have $30,000.” But every dollar you ever have to your name should go into offset accounts: your savings for everything from holidays to school fees and your Holy Sh*t, emergency fund of preferably six months’ salary.
Step 3: Use the bank’s money to save you loan interest
You can also use the bank’s money to save even more interest with my offset-on-steroids strategy.
First, what you do is deposit your salary/ies for the month into an offset account (you can often have up to 10 and name them each for total clarity of purpose).
Next, you put all your expenses throughout that month on a credit card with a long interest-free period.
And finally, you shift the money out of the offset to repay the card only when the bill becomes due.
You get free money, to save loan interest.
If you can ‘flush’ $10,000 in household salaries in this way through a card each month, so leave that amount in an offset, your saving grows to $85,000 and your mortgage-freedom date edges forward again from this and the last step: to three years.
Step 4: Make your repayments fortnightly
This is a quirk of the Gregorian calendar… there are 12 months in a year but not double that number of fortnights, 24, but 26.
That means if you simply make half your monthly repayments fortnightly, you’ll get a whole month ahead. (I can almost see people’s hungover heads exploding all over the country – just trust me!)
The saving: another $48,000 and 3.5 years.
Just realise that you are making extra repayments with this strategy: $90 a fortnight (which should for safety be going straight into an offset account too).
But if times are tight, you’d want to use free Step 3, and keep paying monthly, for preference.
In 2021, it’s totally possible to work the banking system for no (or low) cost… to get debt-free far more easily and early.