| Simple Tips to Pay Off Your Mortgage Faster
Your mortgage is most likely the largest burden to your budget. It is a debt that, if you are like most people, you would like to have it paid off as quickly as possible.
The less time you take to pay your mortgage off, the more money you save. The quicker your road to financial freedom.
It may seem like an uphill battle that you can’t win, but if you follow some simple tips, you may be able to actually pay your mortgage off much faster than you expected.
Purchase a Home You can Afford
The first and biggest mistake many people make is purchasing a home that will stretch their budget past being comfortable. Examine your monthly budget and determine what you actually want to spend on housing – It will most likely be much less than what the bank will tell you that you can afford.
Skip the Honeymoon Period
Many lenders use honeymoon or introductory rates as marketing tools. This will consist of a lower introductory rate that later switches to a much higher variable interest rate. It may seem attractive, but many of these loans then switch to a higher than market rate of interest and also high large refinancing/break fees.
Pay Down Your Other Debts
A golden rule of debt repayments is to clear the most expensive debts first. Meaning to make paying down high interest debts (eg: personal loans and credit cards) your first priority. This will save you cash that can then be used to pay off your mortgage faster.
Hit the Principal Early
Over the first few years it may seem that you are only paying interest and the principal isn’t reducing at all – This is probably right. With compound interest, the higher the principal amount, the less effect the minimum required repayments gave. So it is quite important to add every dollar you can above your minimum repayment amount. This will mean down the track you’ll be paying interest on a smaller amount.
Pay loan fees and charges up-front
Your lender will most likely allow you to include any fees and charges into the loan, so they are paid off with your repayments. This just adds to your principal, your interest and the time it takes to pay off your loan. If you can, pay these upfront.
Each time you pay extra on your mortgage, the less interest is accrued. The most effective way to pay off your loan faster is to increase your repayments. At the time it may seem small and insignificant. But over the life of your mortgage it adds up substantially.
Let’s look at an example:
A mortgage of $500,000 / interest rate of 4.5% over 30 years
Your monthly payments will be $2,533
You will pay a total of $913,000
– $413,000 of interest
If you could instead pay $3163/month
The same mortgage will be paid of 10 Years early
And save you $154,000 !!
Change to weekly or fortnightly payments
By increasing the frequency of your payments, you are effectively saving interest. As by week 3 of each month you will have already paid ¾ of the monthly amount. As interest is calculated daily, this adds up over time to save you substantially at the end of your mortgage.
Set up an “off-set” account
Offset accounts are savings or transaction accounts that are linked to your mortgage. whatever amount is in the savings account is used to temporarily reduce the principal and in turn reduce interest on your loan.
Don’t waste lump sums of money
If you come into a lump sum of money (eg: inheritance, work bonus or tax refund), put as much as you can straight into your mortgage. It will decrease the principal amount owing and therefore the interest that you pay.
If Interest Rates Fall – Don’t lower Your Payments.
Unfortunately when interest rates fall, a lot of people use it as a chance to lower their payments. If you keep your repayments the same when rates fall you will pay your loan off faster.
Don’t Forget about Your Mortgage
You should keep a constant eye on your mortgage and your financial situation. Is your mortgage still suitable for you, are you on the best rate and package? Are there other lenders or mortgage products that would suit me better?
By doing the hard work, you can pay your loan off in the quickest time frame possible saving you many thousands of dollars and years of repayments.