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Own your home sooner


The idea of paying off your home loan more quickly is very appealing and is used by some mortgage brokers as a method of attracting you to their loans. Essentially, there are only two ways to pay off your home loan much faster:

1. find a cheaper interest rate (which may not exist)
2. make larger or more regular repayments on your loan.

In reality there is no magic trick or secret type of loan that will let you own your home sooner. Substantial savings are only achieved by consistently making additional payments on your mortgage. You therefore need to be very careful when brokers claim that you can own your home sooner and make substantial savings by using a line of credit mortgage facility.

To anyone paying a mortgage, the idea that you can own your own home free of debt sooner is almost irresistible. So how can you really pay off your mortgage faster? Should you refinance? Will extra features, such as a redraw facility, mortgage offset account or a line of credit help you? Or should you go for a basic 'no frills' loan instead, and make additional payments whenever you can?

Here are FIDO's key tips for reducing your mortgage:
1
Shop around for the best possible interest rate, because that's your single biggest cost. It’s the underlying rate that counts not the 'honeymoon rates'.
2
If you’re thinking of refinancing, make sure you’ll be better off first. Don’t get 'churned'.
3
If you want additional features, look for a low interest rate loan that has them. Paying an extra 0.5% per cent interest for a loan with features that will save you money, will probably end up costing you more than you'll save.
4
Make extra regular payments if you can. They'll make the most difference in the first few years of the loan, but can be a good idea at any time.


1. Get a low interest rate


Shop around for the home loan with the lowest possible rate. For most people, this will be the single most important thing to get right about your loan.

Look for the 'comparison rate' which takes fees into account. 'Honeymoon', 'introductory' and 'low start' loans may sound appealing, but the savings tend to be short-lived, lasting for perhaps 5-6 months. You may find that once the honeymoon ends, you could end up in a more expensive loan.

The CANNEX website at www.cannex.com.au is one excellent place to start, although magazines and newspaper columns will give you a good idea of current rates for various types of loans too.

When shopping around, consider all types of lenders: credit unions, building societies, banks and non-bank lenders.

Mortgages with the lowest rates of interest may not be the most heavily promoted, and mortgage brokers may not necessarily offer all of them. Some loans labelled 'standard home loans' may in fact be the more expensive.


2. Should you refinance?


By checking the market, you may find a better deal than you currently have.

If so, make sure that you will be better off after taking into account the costs associated with switching your loan. These may include: A few refinancing tips: Steer clear of any sales staff, brokers or loan minimisation 'experts' who try to pressure you into switching loans or use other aggressive sales tactics like cold-calling. Some of these people may try to 'churn' you into a new loan in order to earn commission, rather than making you better off.

There are also some operators who will charge you up to $5000 for advice on loan minimisation. Money like that would take years off your loan, and you don’t need to pay for this kind of advice at all. If you need some advice on your mortgage ask your existing lender or a mortgage broker that charges no fees.


3. Features that might suit you at the right price


Here we discuss three features; redraw facility, mortgage offset and line of credit. The first two might suit many borrowers at the right price, but a line of credit will probably only suit investors or people in unusual circumstances.


Redraw facility


This allows you to make extra payments and then withdraw them if you need them. (You can only redraw the extra payments you make.)

A redraw facility means you can put all your 'rainy day' money in your mortgage, knowing you can get it out again if you have to. Or you can use it to save money for a specific purpose, such as a car. Competitively-priced loans with redraw facilities are increasingly common, but you may still end up paying more.

Points to note: Redraw facilities often: Consider how often you are likely to 'redraw' your money, before deciding whether this feature suits you.


Mortgage offset


This can save interest on your loan. Your mortgage is linked to a savings account into which your salary and other cash can be deposited and from which you withdraw to pay bills, credit card etc when these debts become due. For as long as money sits in the account, it is 'offset' against your loan and so reduces your interest bill. Points to note. Mortgage offset loans:
  • usually charge a higher rate of interest
  • may impose fees and charges for the offset facility
  • may not fully offset the rate of interest on your loan. A 100% offset means your cash earns the same rate of interest as you pay on your loan. Many offsets are partial. For example, if the offset account only attracts 3% interest while your loan attracts 7%, then your interest reduction will less than half.
Offset accounts only work while cash sits in your account, and the savings can be relatively small. For example, suppose your monthly payments are $675. (Roughly what you would pay for $100,000 borrowed at 6.5% for 25 years.) To earn just one extra monthly payment of $675 each year from your offset account, you would have to deposit $10,384 and leave it untouched for a full year - and that assumes you get a full offset, earning interest at the same rate as you are charged interest on your home loan.


Line of credit


Because of the extra costs, a line of credit tends to suit investors and businesses better than owner-occupiers. A line of credit is really like a giant credit card secured against your home, and not like a standard home loan. You get a limit, and so long as you pay the interest charged, you may pay off as much or as little of what you borrowed as you like. You could bank all your pay into this account, like a mortgage offset. Generally, lines of credit:
  • charge a higher rate of interest than a standard loan
  • may charge a fee to operate.
  • credit your loan with the full interest you pay.
The savings can be relatively small. For a rough idea see our comments about mortgage offsets.

If you already have problems with your credit card, or if you think it will be hard for you not to dip into your line of credit for daily living or luxuries, then a line of credit will certainly not suit you. You might never fully own your home at all and still face a large debt when you retire.

If you can negotiate useful features without paying a higher rate of interest, they may help you. Beware however, that paying even an extra 0.5% in regular interest payments may cost you far more than any savings these features might offer.

For example, 0.5% of $100,000 is $500 per year. If you pay 7% instead of 6.5% for the sake of a mortgage offset or line of credit, you would need to find about an extra $7,100 to deposit for the full year just to make up the difference.

For many people, a cheaper loan and making extra payments will be the better solution. Read more about line of credit mortgages.


4. Make extra repayments


The most common mortgages for home buyers require you to pay 'principal and interest'. On a typical 25 year mortgage, anything extra you pay in the first 5-8 years (when most of your payments go to pay off the interest) is especially good at cutting your interest bill and shortening the life of your loan.

Dollars in your wallet always seem to find a way of getting spent. Dollars paid into your mortgage cut your interest bill, and take years off your loan, especially if you start early. They can provide you with a better 'return' than most investments, especially if you take into account the tax you would have to pay on any investment returns.

Extra payments in the last stage of your mortgage are less effective in cutting a lot of time off your mortgage, because most of your repayments pay off the principal, with comparatively little needed to cover the interest. But extra payments still save interest.

Check if your loan will allow you to make extra payments, and if there are any fees for doing so. Home loans with fixed rates may not allow extra payments or, if they do, will commonly limit the amount you can repay over the life of the loan. Also, find out if you have to pay any fees for paying out the loan early.


Multi-loan calculator


FIDO's calculator gives you a snapshot of your current loans and lets you check which of these three options might suit you: paying off your loans faster; refinancing; or changing payments.

Multi-loan calculator

Back to Loans and credit


More help


Buying a home
Types of loans
Mortgage brokers
Loans, families and relationship breakdown
How to complain

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