March 3, 2014
Sometimes the simplest rules and strategies are the most effective – especially when trying to minimise interest payments on your mortgage. It’s easy to focus on the interest rate when signing on the dotted line, but while this is important, the essential ingredient in paying less for your home is how you approach your mortgage repayments.
Here are a few things to consider.
The great divide – interest calculated daily versus monthly Apply the rule of immediate gratification. With loans where interest is calculated daily, any money paid against your balance has an immediate interest-reducing effect. Not so with loan accounts where the interest is calculated monthly.
Make extra repayments Work out how you can lump extra money on your home loan at regular intervals. Maybe it is a bonus, tax credits, or other money you are planning on receiving. Remember, paying down your loan faster is a form of saving, so consider where that money is best placed.
Feature rich, fee free If you’re buying or assessing whether your current home loan provider is best for your needs, look for loans with extra repayment features with no charge. Making extra or more frequent payments on your loan can significantly reduce the loan term and interest but make sure you check out whether there are any fees and rules that apply. Depending on the structure, these could reduce the value of the extra payments you make.
Make fortnightly or weekly payments, not monthly By changing your payment schedule to fortnightly or weekly instead of monthly, you will make one extra payment per year. The beauty of this strategy is that while you spread the extra repayment across the year meaning it’s less of a hit on the hip pocket, you benefit from reducing your loan amount on a more regular basis.
Send your income direct to your mortgage Keeping more money on your mortgage for longer is one of the most effective ways to reduce the interest you pay. If you are disciplined enough, consider paying your income to your mortgage and then paying bills with a credit card (paid off each month of course). Some careful timing could mean your mortgage benefits from a healthy injection of cash, for longer, every time you’re paid.
Make the first payment on the settlement date Rather than waiting until the first monthly repayment is due one month after your settlement date, make the payment on the day you get the keys. This means that you reduce the interest on your loan before the first interest portion accrues on the amount you have borrowed.
Pay loan fees and charges upfront – don’t capitalise Apart from the loan amount, when committing to a mortgage you’ll need to pay certain fees and charges, for example establishment fees and legal fees. If possible, use cash to pay for these upfront rather than adding them to your loan. Doing this avoids increasing the total amount you are paying interest on.