I’ve discovered it’s not knowledge that most of us struggle with. The real issue, which largely stems from a mass influx of data, facts, figures, media and everything else in-between, is retention.
On that note, I’ve compiled my top 11 mortgage tips in one place to make sure you pay off your mortgage quickly and intelligently.
1. Keep your savings on your mortgage. It’s astounding how many families I meet, who have one or more savings accounts while also paying a mortgage. Why pay tax on interest earned from these accounts (even if it’s only a small amount) when you could be offsetting a higher interest cost of your mortgage aka bad debt. If you need to separate your savings from your partner’s, either keep a spreadsheet or journal of deposits and withdrawals. Many apps can make this easy or one of you can use an offset account, and the other directly deposit and withdraw from the flexible home loan.
2. Consolidate your personal finance into your home loan. Provided you have accrued sufficient equity within your home, you can greatly improve your cash flow position by consolidating your car loan, personal loan and credit card/store card debt into one easy low repayment on your home loan. The key here is to reduce the interest rate to home loan rates being much lower than unsecured loans and credit card rates. You’re also extending the term of the loan which lowers your repayment commitment.
To go a step further, maintain the old repayments of your personal finance commitments pre-consolidation into the home loan or offset account. This will maintain the short term of the previous loans and create forced savings, paying down your loan very fast. If you encounter an emergency, the funds will be there when you need it.
3. Use a budget. There are many apps available to track your income and expenses and keep you informed of your spending and savings habits. Out of sight, out of mind is insufficient when managing your money. If you want to save money, you must spend less than you earn, right? Only when you can see your money position can you be responsible for the desired outcome. I continually see couples earning a combined income of $80,000 or less outsaving couples earning two to three times that. You can’t live beyond your means and expect things to be different.
For example, when shopping for groceries, take your shopping list with pre-planned meals and ingredients and you’ll find that you can eat very well for $60-$100 per week for a couple. And never shop hungry.
4. Put your income/s in your offset account. While your income is resting in the offset account or directly on the (flexible) loan, you are saving interest every day. This is because interest is charged monthly but calculated daily. Even if you spend the majority of your income by month’s end, you can still pay your mortgage off in half the time or sooner. I see too many couples and families sticking to old habits and depositing their money into their savings account and thinking it won’t benefit them if they are not saving much or any money each month or simply because they never got around to instructing payroll to deposit their wages into their specified loan or offset account.
5. Every winner needs a coach. I’ve never seen a sporting star that doesn’t have a coach to create their goals, habits and mindset and to hold them accountable. The same could be said of your finances. Many brokers or finance consultants don’t charge for their services. You need to seek a quality coach out and have them on your team. You should not have to pay additional for this service. This is possibly the best investment you can make.
6. Review your financial position regularly. Those who are successful financially all have one thing in common. They know exactly where they are at all times. Equally, those who are unsuccessful don’t have a clue where they are at at any given time. If you don’t like numbers, your partner often does or you can turn to your financial consultant.
Once you know your position, it can make life much easier to automate your bill payments. Preferably set this up within your internet banking so you have the flexibility stop a payment or make a prior arrangement with any billers if necessary. Ensure you communicate with any late or overdue accounts and negotiate an extension without any penalties as late payment fees or default interest undoes all the hard work you’ve previously put in.
7. Review your costs periodically. Once you know where you are at and how much you are spending, it’s easy to compare and lower your expenses. Contact your mobile phone, utilities and other bill carriers and negotiate a better deal. When buying household items and gifts, google the different deal sites and online shopping sites. This can save you up to 70 per cent or more on the cost of identical or comparable items.
When reviewing your costs, eliminate any unnecessary costs. Ask yourself, for instance if you really need Foxtel. It’s not always about going without. Often, it’s about finding more efficient ways to achieve the same outcome. Is owning your own home sooner or going out to dinner more important? You decide.
8. Pay yourself first. If you, like many Australian families are struggling to meet your financial commitments every month or your expenses fluctuate from month to month, pay yourself 10 per cent of your income before you pay anything else. Simply increase your minimum repayment by at least 10 per cent. This creates forced savings as well as some interest cost savings, with this extra money accruing if you allow it. Make sure you are using a budget and you will find you still manage the bills each month just the same.
9. Pay your mortgage more frequently. Many mortgages are set up as monthly repayments which while convenient initially should be changed as soon as you can to at least fortnightly. If possible pay extra by rounding out your repayment to the next higher round figure. For example, if your fortnightly repayment is $1,383, round it up to $1,400 or $1,500 fortnightly. If you get paid weekly, you could even pay your mortgage weekly. Preferably do this once you have accrued a redraw buffer in your home loan, with tax return time often a good opportunity to do this. By paying weekly, you keep a closer hand on your cash flow and you should be less likely to spend unneccessarily.
If it helps, create periodical and proportionate rewards for achieving monthly and quarterly goals. Make sure the reward is something you and/or your family really value and appreciate such as a trip to your favourite dessert bar.
10. Maintain the best mortgage for you. At least every two to three years you should be reviewing your mortgage to ensure you have a mortgage that is suited to your specific needs. I continually see many clients who have had the same mortgage for the last five to eight years and while it was extremely competitive when they got it, it’s certainly not today. The difference in many instances is as much as 1 per cent higher than the current competitive lenders. To find savings, review:
- Structure/s of your loans;
- Fees and charges;
- Features and flexibility;
- Interest rate;
- Your situation and circumstances as they may have changed, entitling you to receive additional discounts or benefits; and
- Repayments taking into consideration all of these points.
11. Increase your earning. Other than spending less than you earn, the only other way to improve your financial position is to earn more than you spend. Conjure up the courage to ask your boss for a pay rise. Have an annual garage sale, take a second (part-time) job or turn a passion into some extra income. Many of our more successful clients utilised or created some equity in their home to create a deposit to purchase an investment property. With the additional income received through rent, they were able to reduce their personal bad debt (home loan) sooner and also maximise their tax benefits through good debt (investment property loan).
John Maxwell, senior mortgage and finance consultant, Cocalex Consulting