Managing your Loan or Mortgage

For a majority of Australians the only way to achieve the Great Australian Dream of owning their own home is to pay a deposit and borrow the remainder for a bank or alternate financial lender. Debt is a common word in Australia today with many families having mortgages on their house in the range of $100,000 to $300,000. The result is that families pay a similar amount ($100,000 to $300,000) in interest over a 25 to 30 year home loan.

There are however many different ways that you can save paying some of this interest and reduce the length of your loan.

Get the Best Home Loan Rate
Shop around for the best home loan rate. At the time of writing, our friends have just changed home loan lenders and reduced their interest payable from an average loan of 7.6 per cent interest to the best standard variable loan currently available of 6.83 per cent. They have maintained their repayments at the original level and with a loan of approximately $220,000 will save at least three and a half years off their home loan and at least $40,000 in interest repayments.

Make Your First Repayment Immediately
Most people wait until a full month after they buy or remortgage a property to make their first repayment. As there is no interest due until a month into the loan, a repayment made immediately following the loan settlement will reduce the principal owing by that amount for the life of the loan. While figures will be different depending on loan amounts, on a $220,000 loan you will save approximately $10,000 and cut around 7 months off the loan term.

Make Fortnightly Repayments
Most loans require monthly repayments. If you are paid on a fortnightly basis (and even if you are not) aim to make your repayments each fortnight rather than monthly. Each repayment should be half of your planned monthly repayment. As there are 26 fortnights in a year, you will make two additional repayments each year which results in an additional month of repayments each year. On a $220,000 loan at 8 per cent interest you will save around $60,000 of interest repayments and cut five years from your loan.

Maintain Loan Repayments Even When Rates Go Down
There will be times throughout a loan, particularly if you have agreed to the variable rate, where the loan interest per annum will go up and down. If the interest rate goes up, the bank will lift your repayments slightly to ensure that you are still paying off the interest and a small amount of principal (assuming you have a principal and interest loan). If however the interest rate falls and you are able to maintain the higher level of repayments, you will potentially save thens of thousands of dollars of interest and take up to 2 years off your loan.

A Combination Works Best
While each of the above strategies works extremely well if your goal is to reduce your interest repayments and the length of your loan, a combination of them will save you tens of thousands of dollars and potentially up to 15 years off your mortgage.

Go for the best interest rate, make fortnightly payments, with the first payment immediately following settlement of the loan and maintain the higher repayments if there should be a rate drop during the term of your loan.