Beware of lenders bearing gifts! Introductory or honeymoon rates have always been an important marketing tool for lenders. You are initially offered a cheap rate in your loan to get you in the door but once the honeymoon period has ended, the lender will switch you to a higher variable rate of curiosity. An example of this is an Adjustable Rate Mortgage (ARM).
There are two issues with this scenario. First, the variable rate is often higher than some from the lower basic loans available so you could end up paying more. 2nd, you need to clearly understand that a honeymoon rate applies only for the first couple of years of the loan and is a minor consideration compared to the actual variable rate which will determine your repayments over the next 20 or so years.
You may also be hit with fairly steep exit penalties if you wish to refinance in the first two or three years to a cheaper mortgage. So make sure you fully understand what you are letting yourself in before triggering on a "honeymoon" with your lender.
2. Pay it off quickly
Period is money. There are all sorts of strategies for paying less interest in your loan, but most of them boil down to one thing: Pay your loan off as fast as possible. For example, if take out a loan of $300, 000 at 6. 5 percent for 30 years, your repayment will be about be about $1, 896. This means a total repayment of $682, 632 over the term of your mortgage.
If you pay the loan out over 15 years rather than thirty, your monthly payment will be $2, 613 a month (ouch! ). But the quantity you will repay over the term of the loan will be just $470, 397 - saving you a whopping $212, 235
· Make repayments in a higher rate
A good way to get ahead of your mortgage commitments is to repay it as if you have a higher rate of interest. Get a loan at the lowest interest rate you can and add two or three points to your repayment amount. So if you have a loan from about 6. 5 percent and pay it off at 10 per penny, you won't even notice if rates go up. Best of all, you will be paying off your loan quicker and saving yourself a packet.
· Help to make more frequent payments
The simple things in life are often the greatest. One of the simplest and best strategies for reducing the term and cost of the loan (and thus your exposure should interest rates rise) is to make your repayment on the fortnightly (bi-weekly) rather than monthly basis. How can this make a distinction I hear you ask? It works like this:
Split your monthly repayment in two and pay every fortnight. You'll hardly feel the difference when it comes to your disposable income, but it could make thousands of dollars and years difference within the term of your loan. The reason for this is that there are 26 fortnights inside a year, but only 12 months. Paying fortnightly (bi-weekly) means that you is going to be effectively making 13 monthly payments every year. And this can make an impact.
Using our example from above, by paying monthly, you will end uprepaying $682, 632 within the term of your loan. But, by paying fortnightly (bi-weekly), you will conserve $87, 254 in interest and 5. 8 years off the loan. Zero pain for you, major benefit to your pocket.
· Hit the principal early
Over the very first few years of your mortgage, it may seem that you are only paying interest and also the principal isn't reducing at all. Unfortunately, you're probably right, as this is among the unfortunate effects of compound interest. So you need to try everything you can to get a few of the principal repaid early and you'll notice the difference.
Every dollar you put in your mortgage above your repayment amount attacks the capital, which means down the track you'll be paying interest on a lot less. Extra lump sums or regular additional repayments will help you cut several years off the term of your loan.
· Forego those minor luxuries
This is actually the bit you don't want to read. Once you have a mortgage, your life will probably be luxury-free (or at least pretty close to it). Think of all the weight you'll lose by giving up your favourite indulgent snack. For the sake of the health you should quit smoking and drink less anyway. Take your lunch at home and save on bad fast food. Trust me, your body will thanks for it.
If you're still not convinced consider the following example. An average day may include a pack of cigarettes ($10), a coffee and donut ($5), lunch ($12) and a few beers after work ($8). That's $35 a day or $175 a week or $750 per month or $9, 100 a year.
Assuming a mortgage of $300, 000 from 6. 5 per cent over 30 years, by making $750 in extra repayments every month, you'd save more than $216, 000 in interest and be mortgage free in only over 14. 5 years.
No one is saying you should live a convict existence but just reducing a little on your expenses will see you reap huge financial advantages.
3. Get a package
Speak to your lender about the financial packages they've on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser or perhaps a fee-free transaction account. While these things may seem small beer compared as to the you are paying on your home loan, every little bit counts which means you can use the little savings on other financial services to turn them into big savings in your home loan.
There are also "professional" packages on offer for amounts on the certain limit, which can be as little as $150, 000. Some loan companies offer discounts to specific professional groups or members of professional organizations. Ask your lender in case your occupation qualifies you for any discount. You might be pleasantly surprised. There are a variety of discounts and reductions attached to these packages so make sure you request your lender about them.
4. Consolidate your debts
One of the best ways of ensuring you continue to repay your loan quickly is to protect yourself against interest rate rises. In case your home loan rate starts to rise, you can be absolutely positive about something - your personal loan rate will rise and so will your charge card rate and any hire purchase rate you may happen to have.
This isn't a good thing as the interest rates on your credit cards and unsecured loans are much higher than the interest rate on your home loan. Many lenders will help you to consolidate - re-finance - all of your debt under the umbrella of your house loan. This means that instead of paying 15 to 20 per cent in your credit card or personal loan, you can transfer these debts to your home loan and repay it at 7. 32 per cent.
As always, any extra repayments or lump sums will benefit you over time.
5. Split your loan
Many borrowers worry about interest rates and whether they will go up but don't desire to be tied down by a fixed loan. A good compromise is a divided loan, or combination loan as they are often known, which allows you to definitely take part of your loan as fixed and part as variable. Essentially this enables you to hedge your bets as to whether interest rates are going to rise and by just how much.
If interest rates rise you will have the security of knowing a part of your loan is safely fixed and won't move. However, if interest rates don't go up (or if they rise only slightly or slowly) you'll be able to use the flexibility of the variable portion of your loan and pay that part off faster.
6. Make your mortgage your key financial product
Mortgage products known because all-in-one loans, revolving line-of-credit or 100 percent offset loans allow you to make use of your mortgage as your key financial product. This means you have one account into which you'll pay all of your income and draw from for your living expenses using a credit card, EFTPOS or a checkbook, as well as making your home loan repayments..
These types of accounts can make a huge difference to the speed where you pay off your loan. Because your whole pay goes into your mortgage account you're reducing the principal on which interest is charged. Sure, you might take a few steps back as you withdraw living expenses but careful use of this kind of product can get you thousands of dollars ahead of where you'd be having a "plain vanilla, pay once a month" home loan.
These loans work well when you'll be able to make additional payments towards the loan. If you are only able to make the same as the minimum repayment on your loan (and not put in any extra) you might be better off with a cheaper standard variable or basic variable loan. Nevertheless, it's not unusual for dedicated borrowers using these types of loans to cut the word of a 30 year-old loan to less than ten.
7. Use your own equity
If you have already paid off some of your home, you're said to have equity. Equity is the difference between the current value of the property and the amount you owe the lender. For example, if you've got a property worth $500, 000 on which you owe $150, 000, you are believed to have home equity of $350, 000, which you can re-borrow without having to undergo the approval process by accessing it through your existing loan.
Many lenders will help you to borrow using your equity as collateral. Most lenders will allow you to borrow as much as about 80 per cent of the loan-to-value ratio (LVR) of your obtainable equity. If you are careful, you can use this equity to your advantage and help to repay your home loan sooner.
Using an equity loan to improve your property could be a great way to ensure that your home increases in value over time. But larger expenses such as cars and holidays that would have already been paid by credit card are more affordable on the lower rate of your house loan.
8. Switch to a lender with a lower rate (But perform your sums)
It may sound like a simple idea but switching from your current loan and taking out a loan at a lower rate can mean the difference of years and 1000s of dollars. If you have a loan that is tricked up with all the actual features, or even if you have a standard variable loan, you might find you could get a no frills rate that is as much as a percentage point cheaper than your present loan.
However, before you jump the gun, check out what it can cost you to switch loans. For example, there may be exit fees payable in your old loan and establishment fees and stamp duty on your new mortgage. Work it all out and if it makes sense, go for this.
9. Stay informed - don't forget about your mortgage
With any long-term commitment, there is always the temptation in order to let your mortgage roll along, make your repayments as they fall due and think very little about it as possible. As long as you keep up the payments, there's not much else you need to do, right?
This attitude could be a big mistake. Keep yourself up to date with what's happening in the market. You might find that there's an opportunity to put yourself well in front of the game. Rates change, new products and changes in the market itself may permit you to seize an opportunity or negotiate a better deal.
Stay informed and stay in front of the game.
10. Get a cheap rate and invest the difference
When rates of interest are low, like now, it is usually safe to say that inflation can also be low. Thus, bricks and mortar may not be the best place to get. Try getting the cheapest home loan you can find and make the actual minimum repayment. This allows you to use the extra cash to purchase other, more profitable areas.
You may find that the return you get on shares or another type of investment means that you have created a nice little nest egg that can be used to pay off a bigger chunk of your home loan than you may otherwise have been able to do.
But beware - high returns frequently mean high risks. Before undertaking any investment, invest in a consultation having a qualified financial adviser.
11. Run an offset account
Instead of earning curiosity, any money you have in your offset account works to offset the eye you are paying on your home loan. For example you may possess a mortgage of $300, 000 at 6. 5 percent and an offset accounts with $50, 000 in it earning 3 percent.
This means that $250, 000 of the loan is accruing interest at 6. 5 percent but the rest is accruing interest just over 3. 5 percent (6. 5 percent on your loan less the actual 3 percent the $50, 000 in your offset account is earning). Imagine just how much you can save!
Of course, the best sort of offset account pays exactly the same rate as your loan (100 per cent offset).
12. Pay all your mortgage fees and charges in advance
Some lenders allow you to add to the amount you borrow instead of picking out cash for your upfront costs. While this can seem a blessing avoid doing this. Consider the following example:
Borrower A borrows $300, 000 more than 30 years at 6. 5 percent. Her upfront costs are $1, 000 but she has enough cash to ensure she can cover these. Her total repayment over 30 years will end up being $682, 632
Borrower B takes out the same loan but doesn't have sufficient cash to cover the upfront costs. So he borrows $301, 000, in the same rate. Her total repayment over 30 years will be $684, 907.
Two thousand odd-dollars might not sound like a large amount but what could you buy with it if it stayed in your own pocket?
13. Pay your first instalment before it's due
With most brand new loans, the first instalment may not become due for a month following settlement. If you can manage it (and your lender will let you), pay the very first instalment on the settlement date. If you do this, you will be one step in front of the lender for the term of your loan. Every little bit counts.
14. Shop around and make sure your lender knows it
One of the most powerful tools you could have in the search for the best home loan is information. Make sure you have rung six lenders and brokers (as well done some internet research) before you start speaking with your preferred lender about getting a new loan or refinancing your current loan.
Make sure you know what rates and features are offered by all of your lender's competitors on comparable products. Be ready to tell the lender what you are searching for and don't be afraid to ask for extras. If they want your company, and know you know what you are talking about, they may expect you'll work that little bit harder to get your business.
Don't be afraid to walk out if you aren't getting the perfect deal you can.
15. Make sure your loan is portable
If there is any chance that you will move house throughout your loan (and let's face it, there is a strong chance), make sure that your lender will help you to transfer your loan to a new property and that it won't ask you for the earth for the privilege.
Be careful. If you sell up and purchase a new house, you could find yourself down thousands in discharge costs in your old loan and establishment fees on your new one.
16. Avoid linking finance
Someone once said bridging finance is so called because it enables you to "pylon" the debt. The joke's appalling, but so is bridging finance. Unless you get your timing right you could find yourself with two home loans simultaneously - with the bridging finance element costing you an extra couple of percent premium about the standard variable rate.
Consider using a deposit bond or selling before you purchase, as it will be much more cost effective for you than an additional loan.
17. Choose the loan that suits your needs
Choosing a loan is about knowing what you need. Draw up a table of potential home loans and rank them. Make a summary of all the features that are important to you and rank them based on importance. Give each feature a score out of 5 - one for unimportant through to 5 for indispensable.
Use this technique for ranking the loans available and pretty soon you'll see the one that's right for you. Keep in mind, different loans have different purposes so you need to match a loan for your need. Taking out an interest only loan suitable for investors if you plan to live in the house is just foolish.
Ditching the features you do not need can save you up to 1 per cent on the interest rate of the loan. Over 30 years that's a whole lot of money you've simply saved yourself.
18. Don't be afraid of smaller lenders with cheap prices
Since the advent of the mortgage managers over the past five or six years there's been lots of talk about smaller and "non-traditional lenders" and how they have forced rates of interest down. With the property boom, plenty of opportunities sprang up for smart lenders with low fees willing to defend myself against traditional lenders and many have done very well indeed.
Some borrowers be worried about what might happen if their lender gets into financial trouble. Keep in mind that you have their money - so don't worry too much. There are some smaller lenders whose names is probably not readily familiar but whose rates might be enough reason to get in contact.
Be wary, however. Some of these smaller lenders can have huge concealed fees and charges. It is true that the interest rate might be reduced, but in many cases, they exit (or penalty) fees can be very high if you refinance or pay off your mortgage in the first few years. Of course, if you're planning on staying with that lender for a while, then these fees will not impact your pocket at all.