30 years is a long time for anything let alone a commitment to paying back a loan, and for most this can seem very daunting. But don’t let it scare you or control you.
Just remember a home loan is a tool to help you buy a house. You are in control, not the bank. They are providing you the tool to make it happen.
The first thing in making sure you don’t let your home loan rule your life is to get your head around how to make the loan work for you – not the bank.
Normally a bank takes money out of your bank account – Called Direct Debit. Commonly the bank will set the repayment date to suit them, or it is based around the “settlement date” of when the loan first started – NOT a date that works for you.
You can l them and change it to a day that works for you, for example a day or two after your pay hits your account. Or you can call them and set up one of the following
OR Depending on your pay office you can actually ask them to pay some of your wage direct into the home loan account. The account has a BSB & account number just like a normal account so your payroll person will not care. Just check with the bank first – this is called Salary Crediting.
OR you can set up a REGULAR pay anyone transfer from your internet banking (called Direct Crediting). This is obviously easy to do, just call your bank to ensure you are paying more than they need.
This takes the stress away each pay – if you pay your home loan first you know it is done and you no longer have to think about it and stress about it each month… (Just don’t forget to call your bank and tell them to cancel their automatic repayments)
You may have heard some on say “pay your mortgage fortnightly…” this is what they are talking about.
There 12 months in every year and 4 weeks in every month right… 4 times 12 = 48, wait a minute, where did the other 4 weeks go?
Technically the correct answer is to use 4.333333 when calculating weeks into months. Most people just use 4 as it is easier.
If you pay weekly or fortnightly you are really getting an extra month in every year compared to if you pay monthly (as the banks tell you too). If you are paid monthly it is still worth considering if you can work it out. Or otherwise consider the other Tips below.
But what does that look like? Assuming you have a home loan of $400,000 and a rate of 6% you will save $99,248 in interest and 5.5 years of your mortgage
I know it seems obvious right? Just pay more you say?? That sounds simple, but most people don’t. Are you aware of how little you need to do to make a massive difference? The key is consistency and to set up the extra repayments to be automatic, so:
For Example: Assuming the same $400,000 loan at 6%
Are you getting excited yet? It is so simple to save lots of money.
Yes, maybe you may win the lottery, but that is not what I am talking about.
But what about if you get a tax return every year. Or maybe you’re a little bit odd like me and you hate coins. So, rather than spending them it I put it in my drawer (yeah I know real fancy!). This can amount to thousands quite easily over the space of a year.
Yeah, sure you could spend the coins or the tax return on stuff. But what would happen if ever you year you took a chunk of it and paid it off your home loan?
So let’s assume that you are diligent and you use this money to make a one off lump sum at the end of the first year of $2,000 home loan. Just one payment in the first year will save you $9,387 in interest!
Imagine if you can do that every year, or even every second year!
What is an offset account, I hear you say… well it is simple, it is a normal transaction account but you do not earn interest you save it. Like your normal account you have now where your pay comes in and you can use Bpay or take money out at the ATM with a debit card etc. the only difference is that it gets linked to your home loan account.
What happens then is then, the balance of this transaction account gets offset against the balance of your home loan (effectively reducing the balance); hence the name offset. So the more money you have in this account, the more you save on interest.
Here is one reason to use an offset account
Let’s look at an example:
Take a two income household, both on $50,000 per year - This means they have a combined annual income of $84,406 after tax.
So, let’s be conservative and say you have $5,000 sitting in your offset account every month (again assuming a $400,000 loan @ 6%) you save $24,306 in interest!
How cool is that? – All you have done is moved your money from one account to another! Think about the savings if you add to that every month, or if you have a bigger number.
* I have calculated the $193,342 stated in my title - by adding up the benefits of:
It totals $193,342 saving and a total of 10 years or 120 months saved of the life of your loan.
And to do this; has it cost you very much? No, not really but it has meant that you have to change your behaviour and that is a key. Most people do nothing with the information. Don’t be one of the masses, be different, and make a difference to your life starting today.
If you’d like The Home Loan Guyto work with you on this process, simply get in touch on (02) 9629 2700 or contact me online and I’ll be in touch.
All it takes is little things. Take the time to set up these things and you will be saving MASSIVE amounts of interest and cutting years off your home loan.
Please remember that if your current loan does not have an offset you will need to change your loan product. So just a suggestion give me a yell and we can review the different lenders (aka banks) to make sure you are getting the best deal. Don’t just trust the dude in the branch to have your best interests in mind.
I trust the information so far has been useful. Give my office a call on (02) 9629 2700 to get started right away, finding a better loan and paying it off MUCH faster, guaranteed.
David Johnson – The Home Loan Guy