Money Management 101: How to save on your mortgage

Home owners and property investors have been enjoying the lowest interest rate environment for a long

And while there’s speculation that official rates may drop even further, it’s uncertain how much of this the banks will pass these on to consumers.

But what if I told you there was a way you could save money, irrespective of the interest rate you’re paying, simply by taking a longer-term perspective on your loan?

What if I told you that instead of saving a few hundred dollars over the course of a year, a 0.5% fall in interest rates could save you thousands over the life of your mortgage?

Interested?

Then read on…

When a fortnight means more than a month

Do you realise that there is a real financial benefit in increasing the frequency of your mortgage repayments from monthly to fortnightly.

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By paying half of your monthly obligation to the banks each fortnight, you are in effect making 13 monthly repayments instead of 12 over the course of a year.

Think about it this way…

If your monthly repayment was say $2,300 and you opted to pay half this amount or $1,150 per fortnight, you would repay a total of $29,900 over 12 months as opposed to $27,600.

In other words, you would make the equivalent of one extra repayment, thereby reducing the term of your loan as well as the interest payable.

But wait, there’s more…

Now consider the savings you could enjoy on your mortgage if you not only opted to make fortnightly repayments, but you also chose to maintain the same level of repayment even though interest rates had come down.

Taking the above example, if you continue to pay $1,150 per fortnight on your mortgage ($2,300 per month), even though the bank decides to drop their rates and reduce your repayments to say $1,100 per fortnight ($2,200 per month), you are now shaving an additional $1,300 off your home loan debt every year.

Now for the best bit…

If these annual savings are not incentive enough to take this advice on board and keep up your repayments as interest rates drop, then let me explain it like this…

Assume you borrow $500,000 over 25 years, at an interest rate of 7 per cent (I know rates are lower today – but let’s just look at the big picture).

By making your minimum monthly repayments over the life of your loan, you will end up shelling out a total of $1,060,147.

But when you choose to pay just $60 a month more, you will shave a substantial $28,917 off your entire mortgage, reducing your total outlay to $1,031,230.

And when you up the ante even higher, paying an extra $200 per month than is required by your lender, your total 25-year debt drops considerably to around $975,231.

This represents a massive saving of $84,842 and three years off the life of your loan!

Double the benefits

Taking a big picture view of your property related debt, aiming to save money on your mortgage over the long run by using these types of financial strategies has a couple of obvious benefits, particularly for property investors.

Apart from saving money, there’s the fact that you are building up an additional cash flow buffer that you can call upon should your investment income drop off for any reason.

You do this by putting the extra repayments into an offset account – which is effectively reducing your debt and interest payments – but this money is yours and not the banks so you can redraw it if needed without asking the bank.

This cash flow buffer could be used in the future to help maintain your mortgage repayments if and when interest rates rise again, meaning that the extra time and savings you buy yourself by paying more than you have to when repayments fall, will continue to pay off.

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Or you could use the funds in your offset account to help cover unexpected expenses or vacancies.

Then of course there’s the fact that you are, in fact, increasing your equity in the property by paying more off your mortgages and thereby reducing your debt.

This is a great strategy when growth in house prices slow down, because it means you can still continue to grow your portfolio’s equity, even if values are stagnating.

A few other tips for our lower interest rate environment…

1. Don’t just go to a bank:
   To make the most of the current competitive banking environment get an investment savvy mortgage broker on your side. One who can think a few steps ahead and structure your finance not just for your next purchase, but for the one after that, and the next one too.

2. Get your broker to review your current facilities:
   Make sure are you getting the best interest rate and the most flexible mortgage terms.

3. Don’t be tempted to take on bad debt:
   Just because rates are low doesn’t mean you should take on bad (non tax-deductible) credit card or store card debt. Don’t buy anything on a credit card that you can’t pay off at the end of the month. And if you do have bad debt, pay it off as quickly as you can

4. Consider fixing interest rates on part of your loan:
   A smart strategy for many investors who have interest only loans is to convert a portion of their debt to fixed a fixed interest loan to secure their cash flow.

Remember, while most investors think that real estate investing is a game of property, strategic investors know it’s also a game of finance.

Finance is what allows you to buy your next property, or the inability to get more finance is what holds many investors back from growing their property portfolios.

So be smart with your finance strategies.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.