How to Pay Off Your Home Loan Fast

1. How to pay off your home loan fast

2. Congratulations, your home loan’s finally approved! But while it’s okay to have a loan now, your ultimate goal is financial freedom. You don’t want to live the rest of your life heavily in debt, right? Your aim is to pay off your loan and be debt-free as much as possible. We know that the 25 or 30 years in your contract seem pretty much a long time away from now. It’s a long time before you hold in your hands on the deed to your property. However, do not worry. There are various ways you can take to pay off your loan faster while allowing you to save money in the process.

3. Gordon Wealth Tip 1. Save on interest payments Here’s an example. Say you took a principal and interest loan for $150,000 for a 25-year term and with an interest rate of 6.50 percent per year. Let us also assume that your loan is fixed, therefore the interest rate is not going to change in the course of the 25-year period. The truth is that when you pay off mortgage early, you can save thousands of dollars in interest. It may seem complicated but the process is actually simple and very possible. If you’re sticking to only your monthly minimum payment, by the time you make your last repayment of the loan, you would have paid back the full amount of the loan, BUT you would also have paid roughly $153,800 just for the interest. This is the same amount as your original loan, if not more, and you could have already put away half of this as savings if you made extra repayments. You first need to know how your repayment is calculated. The minimum monthly repayment for a principal and interest loan depends on how much is needed to be paid every month to pay off the balance of the loan or principal over the loan term, including the interest accrued on that balance. Typical loans last for around 25 years, but you can have a lesser or even longer repayment period depending on your loan. The shorter the term, the higher is the monthly minimum payment. If you can pay off your loan in just 20 years, you would be paying only $118,400 in interests, allowing you to save $35,400 – a significant amount still – if you can finish off your loan five years earlier. Now, if you can pay it even faster, say 10 years, your interest payments will be even lower at only $54,000. This means saving up to $100,000 from interests alone! It is usually recommended to agree on a 25 year term even if you have the financial means to pay if off in 10 or 15 years. This gives you more flexibility and security against unforeseen events in the future, and also gives you a lower monthly minimum repayment as the amount is computed at 25 years, not less. Here’s another example of how you can save on interest repayments on a $450,000 loan with a 4.50 percent interest per year. 2. Understand principal and interests Loan Term (Year) 25 20 10 Interest Repayments $300,375 $233,260 $109,647 Savings — $67,115 $190,728 Unless interest rates change, the amount of your loan repayment should remain constant. Any changes would be in terms of the ratio between the principal and interests payments, that is, how much of your repayments go to the principal amount and how much are charged to the interests. Typically, majority of monthly repayments go to the interest, while the remainder is paid off to the principal. Our sample computations show that it is important to plan wisely your financials before you take out a loan to see how long you wish to be paying a debt and the projected savings you intend to make. In the succeeding sections, we’ll tell you about some of the loan products available to you. However, as the principal is paid off, interests costs also decrease. Eventually, most of your repayments will be spent paying off the principal and the remaining portion on the interests. 4. Organise a budget Ask yourself, “What are your long-term plans? How do you plan to achieve them?” Just as acquiring a property is a major commitment, then so is working out a plan to achieve your financial goals. Without a plan, how would you be able to get from point A to point B, from being a borrower to being financially secure and free? Just as it 3. Make extra repayments One of the ways to easily pay off your loans is by making extra repayments. Even more, you also pay off less in interest, therefore, letting you save thousands of dollars. 3

4. is easy to spend a few hundred dollars on your mortgage every month, then surely, it is also easy to motivate yourself and draw up a plan that can help you achieve your financial goals. introductory-rate loans. To be sure, it is best to consult with your lender the provisions and limitations that your loan product might have. On the other hand, variable rate loans allow you to make extra repayments with no additional costs. With this type of loan, you will not be limited in terms of the amount you pay or in the frequency of extra repayments you make. There are a number of ways to do this, but here are two ideas. First, sit down and work on your personal budget. Determine your total monthly after-tax income, or the money you will be getting after tax deductions have been made, and then subtract from here your monthly basic expenses, including your monthly minimum loan repayment. In your expenses, consider also other lifestyle expenses such as gas/transportation costs, travel and holiday costs, as well as one-off annual expenditures such as insurance. If you are interested in these variable rate loans, here are a few features that you may find useful and beneficial if you’re aiming to pay off your loan earlier than the indicated terms. Redraw facility. A good feature of a flexible loan is the redraw facility that lets you put money left over on a regular basis into your loan, and then use these funds anytime you need to. It is also cheaper in terms of interest, although it is advised to limit only the amount of extra money you put into the loan. The remainder of the amount will be your savings. From here, you can devise a way to see how much more time and money you need to earn and save to pay off the remainder of your loan. This feature is generally part of loans that target low to medium-income earners as well as those who need help budgeting or saving money. This is the “left-over” money added into the loan acts like savings, which may be redrawn if you need cash. Use Gordon Wealth’s mortgage calculator tools to help you create your budget and calculate your loan repayments! Just key in your loan amount, terms and interest rate and you’ll be provided with an approximate amount of what you need to pay every month. Offset loans. This loan product sets up a 100 percent offset account that acts as a separate account from the home- loan account. It functions like a transaction account with an interest rate that is similar or equal to the one charged to your home-loan account. The second option is to identify the maximum time you want to be in debt. If you’re agreeable to paying off your loan for a period of 10 years, then you can work out loan repayment terms that are good for 10 years. The shorter the maximum time you wish to be in debt, the faster you will be able to achieve your dream of financial freedom and success and be debt-free! Say your loan balance is $120,000 the interest is usually calculated on a daily basis and charged to the account every month. With a 100 percent offset account, you can place your earnings here and the balance of your savings ($10,000) is then used to pay off the balance of your home loan. With this, the principal home loan amount is reduced to only $110,000 and you pay interest only on this reduced amount. 5. Get the right loan One of the secrets to saving a huge deal of money is getting the right loan that is best suited to your circumstances. In choosing your loan, make sure that you have a clear understanding and knowledge of your financial capacity and goals. A similar feature to the 100 percent offset loan is the partial offset account, in which case you offset the home loan with the difference between the interest charged on your home loan and the interest earned on your savings account. For example, fixed rate loans and interest-only loans do not offer the same flexibility. Lenders typically provide a maximum amount of extra repayment that you can make without extra fees. This is usually around $5,000 to $10,000 every year. Similarly, extra repayments are not usually allowed when you take out honeymoon or All-in-one loans. Consolidating your loans is one of the ways to effectively raise your credit score. You can avail of all-in-one loans that allow you to combine all your accounts (savings, cheque or loan) and automatically enrolls your pay and other sources of income into the same account. As 4

5. a result, your total loan is decreased, effectively reducing also the amount of interest. If you want to pay off your loan regularly and ensure that you don’t miss out payments on any loans, all-in-one loans that consolidate your debt are a good choice. You can keep the maximum amount of money in your loan account for as long as possible because interest is calculated daily but charged monthly. 7. Explore lines of credit A line of credit may be used for items like a renovation since you only pay interest on the money that you used. Think of it as a chequebook where you pay interest on the total amount of cheque you’ve used, not for each individual cheque issued. A line of credit, also called as equity line or equity loan, sets a borrowing limit that you can use all at once or one at a time. An added advantage of this feature is that it also lets you enroll a credit card. Use the credit card to pay your expenses just before or after your monthly income has been added to the all-in-one account. In this way, you can keep most of your money in your loan account, earn additional points and rewards on your card while saving on interests payments on your credit card because of interest- free days. Here’s an example. Say, you have a line of credit of $200,000. You can use this in one go or in installments, like spending $50,000 on a home repair, an appliance purchase, depositing it in your savings, or even using it to buy stocks. When you take this money, also called “drawing down”, the interest is calculated only for the amount you spent – $50,000 – not the entire $200,000 in your line of credit. While these all-in-one loans have generally higher rates and fees, they are also however more flexible and allow you greater control and better management of your funds and loans at the same time. If, for example, you want to take out an additional $70,000 for another major purchase, such as an overseas trip or a house extension or renovation, the interest would be calculated based on the total money drawn – $120,000 (the first $50,000 and the second $70,000). If you don’t decide to spend the remainder of the money in your credit line, then you won’t have to pay any interests for it. All-in-one and offset loans are some of the loan products that offer features such as using your mortgage as your key financial product and your savings as a way to cut down on the interest you pay. By simply opening a mortgage account that consolidates your income for paying off your monthly expenses, or using a credit card, you can make small but significant leaps in paying off your loan and being one step closer to financial freedom. With a line of credit, you can also split a loan between several products or change your loan according to what suits your needs. Borrowers can split their loan into two, for example a redraw facility for $180,000 and a line of credit for renovations in your property at $30,000. If you’re done with the renovations and have paid off the line of credit, you can also add that amount into the redraw facility, consolidate your loan, cancel the line of credit product, and get a lower interest rate computation. 6. Use credit cards the right way Your credit card is not only for shopping sprees but it can also be used to pay bills, so you can hold on to your money in your offset account longer. The longer that your money stays in your offset account, interest is calculated at a much lower home-loan balance, whereas if you take your money out of your offset account, then interest is computed at a higher amount. 8. Understand equity Equity is earned with every payment you make on your home loan. This is the difference between the current value of your property and the amount you owe your lender. The more payments you make, the higher your equity is. For convenience, you can enroll your major bills on your credit card and use it especially for settling bills on interest- free days. You also get to earn additional reward points! To avoid credit card bill debt, you can pay your credit card out of your offset account before the interest-free days end. You’ll be holding on to most of your money in your offset account (you’ll be using a particular set amount only to settle your credit card bill) and having your interest calculated against a lower loan balance. But, you can also take advantage of this equity to borrow money for other purposes such as other renovations on your property. For example, you can use your equity as collateral to borrow more funds to add another bedroom in your home, retile the bathroom, or add a garage. 5

6. Renovations such as these can increase the value of your home especially if you’re looking to move to a new one and thinking of selling your current property. If you can get a higher sale price for your property because of these added renovations, you can pay off the initial mortgage faster and at the same time, allow you to have greater equity in your new property. 11. Pay at a lower interest rate Interest rates are a substantial factor especially if you wish to save some money. It is important to remember that if interest rates go down, at least your repayment doesn’t go down. Maintain your repayment even if the interest rates go own so you can build equity in your property quicker and save more money in interest payments. 9. Check other home loan packages Our lenders have a variety of financial products you can choose from. Refinancing your loan at a lower rate can also help you save in terms of interest rate without changing the amount of your repayment. So, by continuing to pay at your old “higher” terms, you can pay off your loan the soonest time possible. As example, if your current loan is $150,000 and with an interest rate of 6.57 percent, you can refinance it to 5.97 percent but still make the same monthly repayment at the original 6.57 percent rate. You’ll be able to finish your loan at least 3 years earlier and save at least $35,800 in repayments alone! Discounted home insurance Fee-free credit cards Free consultation with a financial advisor Fee-free transaction account These are some of the products and services our lenders have to offer. While these are little things compared to what you’re already paying on your home loan, these little things count and can go a long way in helping you tuck away a couple extra dollars as savings that you can use on your home loan. The beauty of refinancing your loan is that you don’t also need to change lenders as most lenders are more than willing to give you a “loan variation” that lets you change your loan product to another with only a minimal fee ($100 to $300 which can be paid in installments). 10. Pay fortnightly or weekly Check with your lender the cheapest product that’s perfect for you without the bells and whistles and other trimmings that you don’t need. Alternatively, you can also get the services of a broker you’ve used before to check with your current lender the charge for changing loan products. Normally, loan repayments are calculated on a monthly basis. However, there are lenders that allow the option of repaying your loan on other terms, such as fortnightly or even weekly. If you pay on these terms, you would be able to get at least an extra month of repayment every year. If you decide to change lenders, see about other incentives that you can get for you and your property. You can, for example, ask if you can get half a percentage point off their offered rate, or a break on establishment costs or ongoing fees. Here’s an example. Say your minimum monthly repayment is $1,200. If you pay this monthly without fail for a year, you would have made a total of $14,400 in your loan repayment for one year. However, if you halve your monthly repayment so that you are paying $600 every fortnight, you will be making 26 repayments of $600 for each year. Your total loan repayment then for a year would be $15,600 instead of $14,400, giving you an extra month’s repayment. 12. Cutback on minor luxuries Having a loan requires some sacrifice in your lifestyle. You might not want it, but you need to understand that in order to be able to pay off your mortgage and still afford the basic necessities, you will need to cut back on some of your luxuries. Unless you’re a professional investor who has enough cashflow to move around, it is smart to use whatever extra money you have to paying off the principal of your loan and saving money in the long run. This extra repayment can considerably bring down your principal loan amount if you add them all up. If your loan is $150,000 for 25 years and with an interest rate of 6.57 percent every year, you would be able to pay off your loan five years earlier and save $52,000 in interests. Likewise, paying weekly can also bring you the same savings as you would if you were paying fortnightly. 6

7. Look at your monthly budget and see the difference you can get when you make extra repayments on your loan and the additional savings if you’re able to repay it faster. How much money do you need to be able to make those repayments? Then, look at where you can get that amount from your monthly budget. You will see that by cutting down on some luxuries like a weekly massage, dining out in restaurants, or even a car magazine subscription you’ll be able to save the money needed to make extra repayments. A passive but excellent source of extra income is rent from your property. Your tenant’s rent can go into paying off the loan, which frees you up from the stress of getting the money from your other monthly earnings. You also won’t need to make very drastic changes in your lifestyle as you have a passive income source such as rent that automatically assures that you have the money to make your monthly repayment. If this passive income is quite substantial, you can use the amount to make extra repayments and therefore finish off the loan much quicker. Alternatively, you can also consider this cutting down on luxuries and vices as a way to have a healthier lifestyle. If you’re a smoker, use the goal of paying off your mortgage fast as extra motivation to quit smoking. All that money you would otherwise spend on cigarettes can go into making extra repayments of your loan. It’s considerable savings, actually. Say, you smoke three packs every week – you spend about $117 every month on your cigarette packs and roughly $1,4004 every year. Add this monthly savings from your ciggies and you’ll be able to save over 5.4 years off your mortgage and about $66,350 in repayments. 15. Structure and/or consolidate your loan Structuring or consolidating your loan can also bring you substantial savings. If you own two properties, say the one you live and another one that you are renting out, you may find that you may get tax benefits from the latter property but not from the property where you live. It is then strategic to pay off the property where you live first and enjoy the benefits you get from the property you’re renting out. 13. Check out professional packages To do this, you can structure your loan on your investment property into an Interest-only loan. This will give you extra funds from your normal principal and interest repayment and then use these funds to pay off your loan in the property where you live. To save more and get the best deal out there, try to ask your lender or broker about a professional package that gives you more savings and discounts. Large lending institutions usually offer packages and discounts if your loan exceeds a certain amount, usually over $150,000. And if you’re worried about needing to be a white-collar professional to avail of these, don’t be. Lenders don’t usually label them as “professional packages.” Here’s a sample computation. If you have a loan of $150,000 on your investment property at 6.57 percent interest for 25 years, your monthly repayment would be $1,010. If you restructure this loan into an interest-only loan, your repayment would be reduced to $821 per month, which gives you an extra $198 that you can add to your repayment for your other loan. The discounts you can get from these packages are considerably significant, usually between 25 basis points and 70 basis points off the interest rate. Avail of these packages and get a good deal with just a quick phone call to your broker or lender. Once you’ve paid off your first loan, you can then revert the Interest-only loan into the normal principal and interest loan. 14. Have double of multiple incomes Rising interests rates can also rack up your repayment amount, because with each increase, your loan payable will also increase. In addition to your home loan, other sources of expenditures such as your credit card will also increase. In fact, it is possible that the interest you are paying for your credit card and other personal loans may be even higher than your home loan. You can also pay off your loan quickly by having multiple income streams. An additional source of income that gives you the funds to pay off your loan wouldn’t hurt. You can use the earnings from one for your daily necessities, and the other for simply paying off the mortgage on your property. One way to cushion yourself from these rising interest rates 7

8. is to consolidate your loan under your home loan. So for example, instead of paying 15 percent on your credit card, you can consolidate this credit card debt to your home loan and slash by half the interest rate. Another similar option is refinancing, which can get you a better interest rate. Check with your broker what might be the possibility of consolidating or restructuring your loan, and additional costs entailed if you do so. 18. Pay all mortgage fees and charges up front Your lender may offer to add to your loan amount other charges for the loan application, such as establishment fees, valuation fees and lender’s legal costs. This may seem less hassle, but it will cost you more in the long-term, so avoid agreeing to this if you can. It is always best to pay up front these charges and maintain the original principal and interest loan amount. Remember, however, that consolidating or restructuring your loan is simply transferring your debts into one with a cheaper interest rate. This doesn’t pay off all your loans. You will need to cut down on the use of your credit card to avoid racketing up the amount of your loan. Likewise, you may want to make your first payment earlier than the due date. Typically, most lenders do not expect borrowers to make the first payment 30 days after the loan settles. The longer this money is in your account, the lower the calculation of the interest. On the 2nd anniversary of your loan, you may want to make double payments for that particular month, and so on. 16. Use GST if you’re self-employed Offset accounts are perfect for self-employed individuals and those who do not have a stable source of income. If you are self-employed, you may want to put the money you save into an offset account for your home loan. The longer your money sits in this offset account, the more that your interest is calculated at a lower rate. When it is time to pay your quarterly GST, you can transfer the funds back into your business account and then start saving up again for the next quarter payment. Point is, the more payments you make, the faster you’ll be able to pay your principal, and the more savings you’ll be able to make from lower interests costs. 19. Post mortgage Continue the practice of saving money for other future investment even if you’ve already paid off your mortgage. Once you’ve settled your loan, you will realize that you have extra money. If you’re okay with sticking to your changed lifestyle, something that was a necessity when you were paying off your mortgage, you may want to tuck away that extra money as savings or as investment fund. This way, when you see an interesting property in the future, you won’t need to take out a big loan as you already have some seed money to use for paying off part of the property’s value. Check with your accountant to see how you can make the best out of this arrangement. 17. Make your loan portable Unexpected circumstances such as a change in jobs, marriage or other personal issues may cause you to move out of your current home into a new one. If you still have years to pay on your current home, check with your lender or broker if you can transfer your existing loan to the new property and if the terms will remain the same. Owning a property is a serious commitment, one that requires proper planning on your part. But, more than ever, it also necessitates changes in your lifestyle if you are serious about investing while at the same time ensuring that you are able to meet your daily needs to survive. Indeed, what good is a nice two-storey house in the suburbs if you’re eating shredded newspaper and making your own dog food? Sacrifices in little luxuries can go a long way to helping you save the money you need to make those repayments, and eventually give you a debt-free life with your own house to boot! It would help if you can secure a portable loan at the very start to ensure for such possibilities, otherwise you might find yourself caught up with paying discharge costs for your old loan and administrative fees for the application of a new one. If you can carry over your existing loan to a new property, it would save you tons of hassle and most of all, money. Make this an important consideration when you apply for a loan. Likewise, if you come across an unexpected financial windfall, don’t blow it off at the casino in one night! Nothing 8

9. is as great a waste as losing a big commission or bonus on lottery that pits you against all the odds. Why not enjoy half of it and put the other half into your mortgage or savings for future investment? Finally, don’t forget to regularly check with your broker or lender the loan products and options available that can save you on interests costs. With options like refinancing and consolidating, it is now so easy to restructure your existing loan with less stress, less costs and more savings for you in the long run. 9

10. For more info visit GordonWealth.com.au