There have been a lot of rubbish things about the past year and a half. But for your mortgage, it’s been down-right first rate.
Interest rate, that is.
Where during the onset of the credit crack-up in 2008, Australian borrowers were typically paying between 7 and 8 percent interest on a home loan, today you can get quality rates of 2.5 percent or lower.
What difference does such a dramatic dip make on a fairly average $370,000 loan?
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You used to pay more than the same again on the price of your property when you add home-loan interest – in fact, a total $784,000 (if you let that loan run its full 25-year term). At that loan amount, the interest doubles your out-of-pocket at a 6.37 percent rate.
But today, with a quality possible 2.5 percent rate, the interest outlay has fallen to $128,000… so a total of just $498,000.
And if you can pay more, trick yourself into paying more or simply just work the system smartly, you’ll fork out far less again.
Here are the three tricks to saving a fortune, essentially because of COVID-19.
TRICK 1: Round up repayments
There’s been a lot of attention given to micro-saving and micro-investing and the maximum benefits these can bring, however micro-repaying is just as powerful.
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There won’t be an app to do it for you – where’s the benefit in a bank producing that! But it is super simple for you to procure the interest savings for yourself.
At our average $370,000 mortgage, your required monthly repayments are $2,161 across 25 years*.
Without too much psychological discomfort, you could round this up to $2,200.
And what would be the end benefit? A saving of one year and more than $11,000.
Remember, that’s been pretty pain-free.
TRICK 2: Use the Gregorian calendar
A quirk of our calendar means that while there are 12 months in a year, there are not 24 fortnights but 26 of them.
What that means is an opportunity to, without a lot of hip-pocket pain, pay a little more automatically.
All you need do is halve your minimum monthly repayments, and instead pay these fortnightly. Thanks to our calendar, you will be making one full extra month’s repayment each and every year.
It’s powerful stuff – on that $370,000 loan, you will shave 3.5 years off your loan term and save $45,000 in interest*.
TRICK 3: Use every dollar twice
If you have a mortgage and haven’t heard of an offset account, drop everything!
This is actually an Aussie invention that allows you to significantly slash your time in debt and money outlaid on interest – for free.
How it works is that an offset account is a deposit account that runs alongside and is hooked to your mortgage.
Any money you hold in it does not technically earn interest but instead saves you mortgage interest on that amount. Mortgage interest is always higher so it’s a far smarter move than a deposit account.
What this does is let you use every dollar twice: both for its intended purpose and to cut your loan interest.
Savings for holidays (remember those!), renovations, school fees or your Holy S**t fund itself all these amounts should be netted off your home loan.
How much could you save? Well, on our $370,000 mortgage, if you could hold $10,000 in your offset account at all times, you’d save $22,000-plus in interest and be mortgage-free more than a 1.5 years early*.
This is a particularly beautiful thing, because don’t forget it’s not cost you a cent.
You can also up-level the effect by also having your salary/salaries paid into an offset account. You live off a credit card with a long interest-free period for the month and shift the money from the offset account onto the credit card only when it is due.
Adding in this smartest of smart strategies, which lets you sit a bunch of extra money against your home loan at all times, you could be debt-free years early and far more cheaply.
*Calculations based on an average-over-the-long-term 5 percent interest rate.