Think repaying a mortgage takes nothing but hard slog?
It doesn’t have to be that way - insiders like me know how to work the system so debt freedom is not so much work.
Here are six shortcuts and tricks to getting mortgage-free far more easily:
Shortcut 1: Up stumps but still stump up.
At any given time, there’s 2 full percentage points between the biggest and best mortgage rates - and yes, the biggest is usually from one of the big 4.
If you move lenders but don’t move your repayment, you’ll save a huge amount of time and money.
Say you have $300,000 left from your $500,000 loan, and refinance it from 5.5 to 3.5 percent over the 15 years you have left.
If you simply keep your repayments the same, you’ll keep $45,000 for yourself. You’ll also get out of debt in just 9 years - for paying not one cent more than you’re used to.
Shortcut 2: Get the offset advantage
Thanks to what I call the mortgage-busting secret weapon, there’s a way to use your every dollar twice: once for its intended purpose, and once to slash your loan interest.
Stashing money in a humble Aussie offset account, an account that runs alongside your mortgage, gives you the same interest saving as putting it directly in your mortgage.
So you can safely house what I call your ‘Holy Sh*t’ or emergency fund of preferably six-month’s salary. It will not just keep you protected and secure, but reduce your debt every day.
And you can stash your savings for school fees, for holidays, for furniture or for your next car too.
Say you’re able to sit $30,000 against a typical $400,000 loan at 5 percent – reducing its interest – at all times, you’d save almost $66,000 and nearly 2.5 years.
For really doing nothing.
Shortcut 3: Use the bank’s money to cut your mortgage
Don’t just use offset accounts for your savings - you can use the bank’s money too.
Put all your monthly expenses on a credit card with a long interest-free period, and shift the money out of your offset to clear the credit card, only when the monthly bill is due.
Say you can flush $10,000 through your credit card each month, so leave that amount extra in your offset. Including the benefit of the $30,000 we assumed before that you held in offsets, your interest saving grows by another $17,000, to almost $85,000. And your time in debt shrinks slightly again, to 22 years.
I repeat: all these savings have cost you nothing!
But what if you were able to ‘trick’ yourself into paying just a bit more? Here are three ‘Psychological’ interest-saving tactics that, at very little cost, can bring your mortgage-freedom date ahead by years.
Trick 1: ‘Round up’ your repayment
Heard the buzz about round-up savings or investing facilities lately?
Well, you can apply this exact same mentality to your mortgage - and micro-repayments can get you debt-free years early.
Let’s get back to our average Aussie borrower of $400,000.
Here, required monthly repayments are $2,338, but without too much discomfort to your brain or budget, you could round that up to $2,400, so by $62 - and get out of debt a year early and $17,167 more cheaply.
Trick 2: Make your repayments fortnightly
You may never have given thanks for our Gregorian calendar. But you should start, because you can use it to make an extra repayment every year.
Although there are 12 months in a year, there are not double that number of fortnights; there are 26.
That means if you very simply make half your required monthly repayments instead fortnightly, you’ll be ahead by a full month.
On our model mortgage the saving from repaying $1,169 fortnightly versus the required $2,338 monthly, is $48,000 - and debt freedom 3.5 years early.
Whatever you do, don’t ask your lender to switch your repayments to fortnightly though—they’ll adjust the amount so that you’re in debt the full 25 or 30 years and so pay them the full slug of interest.
You need to figure out yourself what is half, and then just establish a direct debit of that amount.
Trick 3: The only way is up, baby!
Try never to decrease your mortgage payments. You should maintain them at exactly the same level not only if you refinance to a cheaper deal, but if the rate falls on your existing home loan.
This is pretty much the best free kick to kick debt.
You can quite clearly manage repayments, even if they’re a struggle, so take the opportunity to vanquish your debt sooner… with the excess going into your offset account.
This is an edited extract from Nicole Pedersen-McKinnon’s new book: How to get mortgage-free like me, available at NicolesSmartMoney.com.au. Follow Nicole on Facebook, Twitter, LinkedIn, YouTube and Instagram.