Paying off your home loan earlier – is what you’re being sold really the very best deal?
There are several ways that you can pay off your loan sooner, but they generally involve you paying more now, to reduce your balance and save paying more interest.
How can you get ahead, but not have to increase your repayments?
Commonly promoted ways to pay your loan sooner are:
1. Pay more than you are currently paying
2. Pay more frequently than you are now e.g. increase payments from monthly to fortnightly
3. When interest rates drop, keep loan repayment amount the same
4. Pay lump sums each year before re-fixing
These methods will effectively help you reduce the term of your loan and ultimately save you paying thousands of dollars of interest charges to the bank, BUT – you’re still paying more for this privilege!
There is a way to keep repayments the same (i.e. NOT impact your lifestyle) AND pay your loan off sooner AND save yourself potentially hundreds of thousands in interest charges in the process.
How do I do that you ask?
Simply by structuring your mortgage in a manner that allows you to “offset” any positive balances you have in other accounts. Your savings and transactional balances can offset your loan without needing to actually pay more towards your repayments. This effectively reduces the loan balance owing and lowers the interest amount you owe. Clever and Simple – yes!
This loan structure also allows you the flexibility to pay off lump sums any time or pay more towards your loan than required.
Contact us today to see how the split loan structure we recommend, can put you in a position to pay your loan off years earlier and save hundreds of thousands, without paying more!
Here’s a bit of info on loan structures if you’re not already familiar:
Fixed vs Floating:
There are fixed mortgage rates and floating (variable) mortgage rates.
Fixed rates are typically lower. With most banks the minimum term you can fix for is generally 6 months and the maximum 5 years. Some people split their mortgage into a few separate loans, some floating, some fixed.
Floating allows you to focus on repaying the loan inclusive of lump sum payments without penalties, while fixed gives you certainty around rates for the period you fix for (but with less repayment flexibility). And thus, a combo can offer the best of both.
Then there are a few more types of mortgage accounts available with floating rates:
Revolving Credit Loans
These are basically a giant overdraft, with one account acting as your loan, transactional and savings account all in one. Your pay goes straight into the account and the idea is to leave the money sitting there as long as possible (eg putting your expenses on a credit card and paying them off at the end of the month). By keeping the account balance (and thus, loan balance) as low as possible at any time, you save on interest charges because the bank calculates interest daily. The cumulative effect of this becomes very significant over time.
Obviously, this requires discipline and organisation, though you may be able to set it up so that your credit limit reduces over time, making it easier to stay on top of things and ensure you’re making progress.
Similar but different, an Offset Mortgage is linked to your other accounts with the bank. Your mortgage interest is offset by the amount you have in your other accounts. For example, if your mortgage balance was $500,000 and you had $20,000 between your savings and chequing accounts, you would only be paying interest on $480,000. But compared to revolving credit, offsetting is not offered by as many banks. Offset accounts are offered by Westpac, BNZ and Kiwibank.