Pay more and pay often
Assuming you have a mortgage that lets you pay extra, you should pay more and pay often. Subject to the terms of your loan and your circumstances, making additional repayments can help you repay your loan quicker and save you money. If the outstanding balance of your loan is lower, then the amount of interest you will have to pay will be lower.
For example, the interest charged on a $300,000 Home Loan at a rate of 7.15% over 30 years with monthly repayments is over $420,000. By paying off an additional $50 a month, you’ll reduce the interest bill by $39,000 and your loan term by 2 years and 4 months. You could look at making repayments weekly or fortnightly rather than monthly. Over 30 years the savings add up.
If you are serious about wanting to reduce the interest you pay on your Home Loan, you’ll act now. To learn more, talk to BMG Financial Services today.
Introduce a 100% mortgage offset facility
Most lenders will allow you to use a transactional bank account to hold savings that will reduce the interest you are paying on your mortgage, typically known as a mortgage offset facility.
Generally how this works is that for every dollar in the transactional bank account, it will offset against the outstanding balance in your loan account and reduces the amount of interest payable on the loan. The transactional bank account, called an offset account, is linked to a nominated loan. Income you receive from time to time and other money you have can be deposited into the offset account. You will be able to access the money in the offset account and use it for all your EFTPOS, cheque, internet banking, withdrawal transactions, bill payments and funds transfers.
The balance of the offset account effectively reduces the amount of interest payable on the nominated linked loan. That is, whatever is in the Offset Account comes directly off the loan balance, or ‘offsets’ the loan amount for calculating interest payable. Effectively you are not earning interest on your savings, but are benefiting as your savings reduce the interest payable on your loan.
For example, if you have a loan with an outstanding balance of $500,000 and you deposit $250,000 in the offset account, the interest calculated will then only be based on the net outstanding balance, being $250,000 in this example. However, if you are using some of the funds in the offset account and the balance is fluctuating, then the interest benefit will vary from time to time.
Consolidate your debts to make it easier to achieve your goals
You’re generally paying a higher interest rate on unsecured loans (e.g. credit cards and personal loans), so it makes sense to eliminate those debts first. By putting a rein on your credit card usage you can tackle your mortgage, alternatively you can consolidate these debts into your home loan by refinancing and restructuring your mortgage. You can still separate the deductible debt using different loan accounts and you will receive a separate itemised statement at tax time. Subject to consulting your accountant or tax adviser, you may want to pay off your non-deductible debt as quickly as possible and should determine with your accountant or tax adviser the most efficient and suitable structure for you to achieve this.
Make sure you are paying off the right loan product
When you entered the mortgage market, you might not have been as well informed as you are now. Or the market might not have been as competitive. Stay in close contact with your BMG Financial Services broker. They can let you know if there is a new home loan product that will save you money over the term of the mortgage.
Flexible mortgages
Most debt-retirement strategies depend on you being able to pay off more of your mortgage sooner. Read the fine print or talk to us to see if you have the flexibility you need to reduce your interest charges.
> BMG Residential
> A guide to the types of home loans
> Steps in the loan process
> Why refinance?
