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Your mortgage may perhaps be one of the most significant long-term financial commitments and paying it off sooner could greatly expedite your financial freedom journey.
Here are six easy measures anyone could deploy to close their home loan sooner.
1. Ensure that your rate is competitive:
Lenders typically pass on rate cuts to new borrowers only. After a recent rate-cut check if your lender is offering you the same rate as new customers. If you are being charged more, then have a conversation with your lender. Also, remember that lenders are under no obligation to pass on the rate cut to their borrowers. So even if you are paying the same interest rate as your lender’s new customers, it does not mean you can’t find yourself a better deal. Keep a tab on the most competitive rate the market is offering by engaging a mortgage broker. Lenders pay brokers upon settlement of a loan, and their services are therefore usually free for borrowers. Lower interest rates imply savings which you could plough back into your home loan to pay it faster.
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2. Leverage your property equity:
Equity is the difference between your property’s value and the amount you owe your lender. For example, if your property is valued at $500,000 and you owe your lender $300,000, then your equity is $200,000 or 40%. As the value of your property appreciates so does your equity. Lenders consider owners with higher equity to be low-risk borrowers and charge them a low rate. So technically as your property appreciates and your equity goes up, you should be charged a lower rate. This, however, doesn’t happen automatically. You need to check the rate your lender charges new clients for the same level as your current equity and make sure you pay the same rate. If your lender doesn’t budge, be prepared to walk away and refinance. The savings from a lower interest provide you with an opportunity to put them into your mortgage and close it sooner.
3. Make repayments more frequently:
Most lenders provide the option to make repayments weekly, fortnightly or monthly. Opting for the most frequent mode lets you save a pretty sum on the total amount of interest you pay.
4. Plough back savings into your mortgage:
If you can afford to pay in more regularly, doing so would save you thousands in the long run and help you close your loan sooner. There are two aspects to paying in more.
- Increase your repayment size: In the wake of multiple rate cuts, if you are financially secure, it is very likely that you’re in a position to make larger repayments. This is because if your mortgage is over a year old, your interest would have been a lot higher than what you are being charged currently. Further, in addition to a higher rate, your lender would have whetted your payment capacity against a ‘test rate’ which is usually 1-2% greater than the rate your loan settles at. You can therefore easily afford an interest rate that is 2-3% higher than your current rate. By using these saving to make larger repayments you can shave a few years off your mortgage.
- Put back windfall gains into your mortgage: Consider using any sudden inheritance or large bonus to make larger repayments.
5. Learn to leverage loan features:
As the mortgage market continues to evolve, features like an offset account, split loan and redraw facility among many others could save you a lot in terms of interest and leverage the lower interest rates to the best possible extent. If you are having a hard time understanding how to use these features, it’s best to rely on a mortgage broker’s professional advice.
6. Monitor your mortgage:
Unfortunately, a fix it and forget it approach does not work well with mortgages. You need to stay atop the latest interest rate and loan feature to pay off your loan sooner. The easiest way to do this is to proactively keep in touch with your broker to understand rate cut announcements and the roll-out of new features. Work with your mortgage broker to flesh out a strategy that makes use of latest loan features and works best for your specific needs and goals.
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