Change your repayment frequency
When your wages first hit your bank account you’re most likely more flush with cash compared to the day before payday. That’s why coordinating the dates of your home-loan repayments and salary payment may help pay off your home loan more quickly – you’re effectively increasing the amount you have in your bank account to repay your loan.
If your salary is paid fortnightly but you’re repaying your mortgage on a monthly basis it could be worth switching to fortnightly home-loan repayments. By paying fortnightly compared to monthly you will actually make one extra loan payment each year, and pay off your home loan a little sooner.
To explain, if you’ve got a principal and interest loan and you’re paying $3000 each month towards your home loan, in one year you’ll repay $36,000 (without interest charges). If, instead, you pay half that amount ($1500) every fortnight, you will, over the course of year, pay an extra $3000 (equivalent of one extra monthly payment), which would bring your total annual home loan repayment to $39,000. Because interest is calculated daily, this additional annual repayment could save you interest and reduce the life of your loan.
Make sure you conduct a detailed budgeting exercise to ensure you can afford the extra repayments over the long term before you visit your home lender to review your loan.
Pay more than the minimum
You can use any large lump sums that come your way to the same effect. Just got a tidy return from the tax office? Or received an inheritance, redundancy, work bonus or dividends from your investments? Consider placing the lump sum into your home loan. (Again, keep in mind any penalties for early repayment of the loan.)
Such payments reduce the principal amount of your home loan (rather than just paying off interest), which means less interest and the potential to pay off your home loan sooner.
Use an offset account
An offset account is a handy tool for reducing how much interest you’re charged on your mortgage. It is a transaction account linked to your home loan, but when calculating the interest on your home loan the money in your offset account is deducted from the balance of your home loan. A smaller balance means less interest charged, helping you pay off your home loan sooner.
Say you have a home loan balance of $350,000 and there’s $25,000 sitting in your offset account. That means you only have to pay interest on $325,000. Over 30 years and with a constant interest rate of 5 per cent and a balance of $25,000 in your offset account for the duration of your home loan you could save $75,000 in interest and shave three years and three months off your loan. In addition, you will still have access to your savings for those unexpected expenses or for emergencies.
Don’t miss a repayment
Missing a repayment often means paying fees, such as an arrears-management fee and a dishonour fee. The latter is applied to any payments or debits from your account that are rejected because of insufficient funds.
You may also lose out on the mortgage interest rate you signed up for, as a default interest rate can be applied to overdue payments and may be higher than your original interest rate. Worst case, you might be hit with legal fees if the matter ends up in court.
If you’re having issues making repayments contact your lender as soon as possible and discuss the possibility of changing the terms of your loan. (You can have your loan repayments made from your offset account if one is set up.)
Pay off your credit card (and consider cutting it up)
If a significant portion of your money is already being used to pay off your home loan, then you probably won’t want any credit-card fees cropping up.
Make sure you pay off your credit card in full before the due date so you can avoid being charged interest. Through internet banking (depending on your credit-card provider) you may be able to set up automatic repayments from a savings account, reducing potential of incurring late fees.
At least opt for the minimum repayment to ensure you’re not hit with a late fee.
If you want to take it one step further, consider doing away with your credit card(s) entirely. Once your credit-card debt has been paid off, put your credit-card spending on hold. After all, the interest and fees you may have paid for your credit card are much better off being put towards extra home-loan repayments. A debit card linked to your bank account can be used to transact just like a credit card, except it’ll just be your money you’re spending.
Get insurance to keep you on track if the unexpected happens
Unexpected events – such as losing your job or becoming injured or sick – can impact your ability to repay your home loan. Missing one or more repayments can be quite costly if you’re subject to extra fees. On top of that you risk affecting your credit report and possibly even losing your home if you experience long-term incapacity to pay.
That’s where insurance may come in handy. Insurance can help guarantee your home-loan repayments continue as normal until you’re back on your feet and able to earn your regular income again.
Taking out insurance such as income protection may provide you with the peace of mind that if you are unable to work due to injury or illness you will continue to receive most of your income. Mortgage-protection insurance is another option. It provides cover for mortgage repayments for a limited period of time in case you become sick or injured, or if you die you may receive a lump-sum payment (up to $1 million towards your mortgage under ANZ Mortgage Protection insurance).
There may be waiting periods before the insurance policy makes the first payment, so you may need to rely on having some sick leave or savings to meet the gap.
See a financial planner
If you want to get professional advice on paying off your mortgage, consider talking to a financial planner. A planner is a trained professional whose job is to help you achieve your financial objectives. They can assist with strategies for paying your mortgage more quickly, tailored to your lifestyle and budget.
For more information on how a financial planner can work with you to meet your financial goals check out our financial planning FAQs.
What to do if you can’t make repayments
If you’re struggling to make repayments the first step is to talk to your lender. By getting in touch with them early you may prevent the issue escalating and becoming unmanageable. Your lender might be able to reconfigure your mortgage repayments so they suit your circumstances. And there’s a possibility you can sort out a payment plan (these are often arranged on a case-by-case basis).
At ANZ you can apply for financial-hardship assistance if you’re going through a loss, illness, separation or divorce. Financial-hardship assistance can be a short or long-term solution to provide you with some financial relief. For example, you might be able to restructure your loan or reduce your payments. This kind of support can help you manage your finances and get back on track with your loan repayment