Fast-track your mortgage

The best way to own your home sooner is to get a cheap loan and make higher payments, more often.
 
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01 .Introduction

House

In the past we've seen debt reduction, mortgage minimisation and other schemes promising to unlock mysteries and provide new ways to clear your home loan sooner.

Some suggested you could repay your loan quicker without making extra payments or even benefit by paying thousands of dollars for a plan that explains how you can save, you guessed it, thousands of dollars.

But the real secret to clearing most mortgages sooner is there is no secret. The quickest way to pay off any loan is to just pay it off.

This report tells you five ways to fast-track your mortgage, explains the pros and cons of refinancing and highlights some of the mortgage schemes you should think twice about.

Making extra repayments can have a huge effect. Several of our case studies were amazed at how modest extra payments could save them tens of thousands of dollars in interest in the long-run.

Compare mortgage rates

Read our report How to choose the right home loan and use the interactive calculator to compare today's top 25 interest rates for different types of mortgages.

Please note: this information was current as of March 2008 but is still a useful guide to today's market.


 
 

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02.Four ways to save

 

1. Make bigger repayments

Increasing how much you pay, particularly in the early years, can have massive long-term benefits. Many bank and lender websites have calculators that approximate the effects of changing your repayments. Plug in your loan and payment details to see what difference a change could make, or ask your lender to crunch the numbers for you.

Example: Georgina has a $400,000 variable loan, with a rate of 8.5%. The loan has twenty five years left to run at her present repayment levels (the minimum fortnightly repayment). Adding $100 per fortnight to the minimum fortnightly repayment would cut four and a half years and over $119,000 in interest off Georgina’s loan.

2. Turn pro

Depending on the amount you’ve borrowed (or sometimes your salary or line of work), you may be eligible for a low-rate ‘professional package’. They can include fee-free transaction or credit card accounts, discount insurance, financial advice and other ‘relationship’ benefits. Interest can be around 0.7% lower than standard rates.

3. Pay fortnightly

This is really just a way to make yourself pay more to your lender each year, thereby cutting interest and years off your loan. By paying every two weeks you’ll make the equivalent of an extra month’s repayment each year (as each year has 26 fortnights)

Trap: fees can be around $300 per year so ask your lender to show you how long it’ll take for interest savings to cover the annual fee. Will you end up paying more for the add-on services than if you’d shopped around for them separately?

4. Ditch the bells and whistles

Interest rates on basic mortgages are often lower than rates on standard (premium) and equity (line of credit) loans. If you need the additional features that premium mortgages provide, great, but if all you need is a ‘no frills’ loan, why pay extra?

Example: George had been paying around 0.5% more than his lender’s basic rate to have the flexibility to fix a portion of his loan some time in the future. “I had no intention of using the fixed rate option, so when I realised I was paying 0.5% more for it I switched to the lender’s ‘plain and simple’ loan,” he says.

Extra repayments calculator

Extra loan repayments
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03.If you have a lump sum

 

Pay a lump sum

As long as your lender doesn’t penalise you for making extra payments, your mortgage can be a pretty good ‘investment’.

  • You’ll reduce the principal amount on which interest is calculated (so you’ll pay less interest overall) and clear the loan quicker.
  • This effectively gives you a return on the ‘invested’ lump sum equal to your mortgage rate tax-free.

For example, if your marginal tax rate is 31.5% (including the Medicare levy), you’d need to find an investment returning around 12% before tax to give the same benefit as a mortgage lump sum payment. If you pay income tax at 46.5% (including Medicare), you’ll need to earn almost 16% to make a similar profit. There aren’t many low-risk investments returning 12–16%.

Example: Craig and Danielle pay the minimum weekly amount on their 30-year $400,000 loan, which is in its third year. The rate is 8.5%. Paying a one-off $5000 lump sum after year three would cut around a year and three months off their loan, saving them nearly $42,000 in interest in the long-run.

Lump sum loan payment
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Fixed rate penalties

Most fixed rate mortgages penalise or limit early repayments during the fixed term; the same restrictions don’t usually apply to variable rate loans but check your loan agreement.

Check statements for errors

They can include calculation mistakes and incorrect timing of debits. One borrower was charged an incorrect fixed rate for 18 months — when she found out she got around $500 back from the lender.

Keep pace with rate hikes

If the Reserve Bank of Australia (RBA) increases interest rates, your lender is likely to follow soon after. Try to keep pace by increasing your regular repayments. If you think rates will rise but want your repayments to stay the same, consider locking into a fixed rate. It might be higher, but you’ll know what your repayments will be for the fixed term regardless of RBA changes. ‘Split loans’ divide your repayments between fixed and variable rates.

Early payout fees

They sometimes apply to variable rate mortgages, especially in the early years. Check what your lender charges.

When rates decrease

Maintain repayments at their current level (or higher) as whatever you pay over the minimum amount reduces the principal owed reducing the interest paid too.

Redraw

Check if extra fees apply, and remember withdrawing repayments you’ve made could put your loan back into the slow lane.

05.Refinancing tips and traps

 

Tips

Discount brokers: one way to save on switching costs may be to use a discount mortgage broker. Some rebate some of the up-front commission lenders pay them. This could give you back around $1000 on a $300,000 loan.

Give your lender a last chance to keep your business. Tell them the new rate or lower fees you’re switching to and see if they can match it or do better.

Look for specials like zero application fees with new loans.

Traps

Switching to a cheaper lender might save money but traps can include:

Exit and ‘deferred establishment’ fees: (a set amount, equivalent to several months’ interest or a percentage of the original amount borrowed if you pay out the loan early). They’re increasingly applied to borrowers on an introductory rate.

Establishment fees for new loans can be up to $800.

Other costs: stamp duty, legal and property valuation costs can exceed $1000.

There’s no guarantee the new lender’s variable rate will stay the same or remain competitive.

‘Honeymoon’ or ‘teaser’ rates only apply for an introductory period; then repayments revert to the higher variable rate. Check all fees and loan ‘comparison’ or Annual Average Percentage Rates, which incorporate ongoing costs including fees and interest for various loan terms and amounts borrowed.

For more information, see Refinancing your home loan

Standard and basic variable loans

So-called basic variable loans can have traps. While they’re often 0.5% cheaper than the standard variable rate, disadvantages may include:

  • Higher ongoing fees
  • Early repayment fees: for example, one low-rate basic loan has a 'deferred administration fee' of 1.2% of the original loan amount if the loan is paid out in full within the first 4 years.
  • Significant restrictions. For example, some loans only allow borrowers to repay monthly, so people looking to fast-track by making extra repayments need to upgrade to a higher-rate loan.

However, more recently, we’ve seen the introduction of basic loans that offer facilities that were traditionally only available with more expensive standard variable loans. These facilities include redraw and offset accounts.

Renegotiate with your lender

If your interest rate is as high as the major banks’ standard variable rates, you’re probably paying too much. Most banks will give discounts of up to 0.7% off standard variable rates, to customers with a large enough loan. If your lender isn’t prepared to give you a better offer, consider shopping around

06.Schemes to think twice about

 

Refinancing to a line of credit loan

Schemes involving refinancing your traditional loan into a line of credit mortgage, having your salary paid directly into that account, and using a credit card for daily expenses, with the bill paid by the line of credit loan, are sometimes promoted.

According to one bank, these loans (also known as equity loans) weren’t originally designed for borrowers to reduce their loans more quickly; they were primarily for people to access equity for investments.

The availability of credit is too big a temptation for some borrowers, so they end up not paying off their loan as quickly as they would have. Interest rates are often higher than standard mortgages and refinancing costs and fees can apply.

Anyone promising to cut years and interest off your mortgage for a fee

Avoid complicated and confusing plans. They can cost thousands in fees, involve unrealistic budgets and refinancing into a line of credit loan (see above). To save anything you’ll need to curb your spending and stick to a rigid budget, which you could do with your existing loan without paying thousands in fees.

Mortgage churning

Don’t get churned into a new loan (some unscrupulous brokers may do this to earn commission from the lender) unless it’s in your best interests. Switching lender can be very expensive and outweigh the benefit of sticking with your loan and making extra payments or negotiating with your lender for a better rate. Before switching, check out what exit fees will apply for the old loan, and set-up fees for the new one.

Using mortgage brokers has more on how to get the most out of a broker.

Debt consolidation traps

Consolidation means getting a new loan to pay out other loans and usually involves turning short-term borrowings (for example credit card purchases, an overdraft or car loan) into long-term debt secured against your home.

Your monthly repayments might be lower for a short time and while consolidating additional debts into a mortgage can work for some people, there are pitfalls. You could pay more interest overall, be paying back your credit card purchases over 30 years and if you default on this bigger secured loan, under the worst-case scenario, your home could be sold by the bank to recover the loan amount.

For more information on debt consolidation check out our free report on Credit card control.