By Michelle Baltazar
You’ve seen all the SALE signs plastered on shop windows to herald the EOFY (end of financial year), but before you open your wallet to buy yet another sale item, you could be better off setting your money aside for your mortgage.
Sure it won’t give you the same high that you get from getting your retail fix but, according to mortgage broker Mortgage Choice, you can save as much as $10,000 in interest if you put a lump sum of $2,000 into a 7% 30-year $300,000 home loan.
So before you start planning how you’re going to blow your tax refund this year, think about how good it would feel to have thousands of dollars saved on your home loan (most of the SALE items you buy will go out of style but being a property owner won’t).
Tips to help reduce your mortgage debt:
1. Repay your mortgage more often. For example, making fortnightly repayments equal to half your minimum monthly repayment means you pay one extra monthly repayment each year.
2. Contribute lump sums when possible. This reduces interest owed and the loan term. If you put your tax return, say, $1,000 into a $300,000 loan (at 7% over 30 years) at year one in, it reduces the term by one month and the interest owed by just over $2,360. Think about doing so annually.
3. Build a financial buffer. Home loans with offset accounts enable you to link a savings account to your loan and ‘offset’ (use) that amount to reduce the interest owed. If you kept $5,000 in an offset account, then on the above-mentioned loan the term would be reduced by almost two years and you would save over $33,000. Note there could be an ongoing account keeping fee.
Tips to avoid piling up any debt:
1. Resist the temptation. Always set a budget and make a shopping list, whether you are shopping for groceries, furniture, travel, property, etc. Avoiding overpriced or impromptu purchases will keep your budget in line and help with credit card debt as often unplanned purchases end up there.
2. Don’t be late on repayments. Dodge accruing interest by scheduling automatic home loan and other debt repayments. Funds transfer on the date selected by you (ie. your payday or the day after). The only thing left to action is increasing your repayment if the interest rate increases.
3. Create emergency savings. Repay your loan as though its rate is at least 2% higher, putting this straight into your loan or its offset account. This buffer will help with emergencies, rate rises or unexpected bills, so these costs won’t end up on your credit card or gather late payment costs. If your loan doesn’t allow extra repayments, put the extra funds into a high-interest savings account.
Source: The Australian Filipina