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Bill and I would like to thank you for your assistance in securing our most recent loan. This is the second time we've used your services and on both occasions we've been delighted with your quick, diligent and...


Fast Track Your Mortgage

Source : Australia Securities and Investments Commission. (ASIC)

The idea of paying off a home loan quickly is very appealing. Essentially, there are only two ways of doing this:

  • Finding a cheaper interest rate (which may not exist)
  • Making larger or more regular payments on the loan.

In reality there is no magic trick or secret type of loan to own a home sooner. Substantial savings are only achieved by consistently making additional mortgage payments.

To anyone paying a mortgage, the idea of owning a home debt free is irresistible. So how can a mortgage be paid out faster? Should the loan be refinanced? Will extra features, such as a redraw facility or a mortgage offset account help? Or should a basic 'no frills' loan be considered with additional payments being made whenever possible?

  1. Shop around for the best possible interest rate, because that's the single biggest cost. It's the underlying rate that counts - not the 'honeymoon rates'
  2. If you're thinking of refinancing, firstly make sure you'll be better off. Don't get 'churned'.
  3. If you want additional features, make sure they are a part of a low interest rate loan. Paying an extra 0.5% interest rate a loan with features that will save you money could end up costing you more than you'll save.
  4. Make extra regular payments if you can. They'll make the most difference in the first few years of the loan, but they are also a good idea at any time.

1. Get a low interest rate

Shop around for the home loan with the lowest possible rate. For most people, this will be the single most important thing to get right about a loan.

Look for the 'comparison rate' which takes fees into account. 'Honeymoon', 'introductory' and 'low start' loans may sound appealing, but the savings tend to be short-lived, lasting for perhaps 5-6 months. You ma find that once the honeymoon ends, it could end up being a more expensive loan.

When shopping around, consider all types of lenders including banks and non-bank lenders. The office is only a phone call away with any help you may need.

2. Should you refinance?

You may find a better deal than you currently have by checking the market.

If so, make sure that you will be better off after taking into account the costs associated with switching your loan, These may include:

  • Termination or break fees for any early exit of the current loan. For fixed rate loans, in particular, such fees may be high. Lender's legal fees for discharging the mortgage over the property also have to be paid.
  • Fees and costs associated with the new loan : application fees, stamp duty on an new mortgage, valuation and legal fees.

A few refinancing tips:

  • Ask if the current lender can match the best deal you can find or offer you a better loan than your current one. This may avoid some refinancing costs.
  • As if the lender will waive fees to get your business.
  • Ask if you qualify for a discount on your loan (sometimes called a 'professional package')

3. Features that might suit you at the right price

A redraw facility or a mortgage-offset account may suit many borrowers at the right price. Outlined below is the difference between the two.

Redraw Facility

Allows extra payments to be made and then withdrawn if needed. (only extra payments can be redrawn.)

A redraw facility means that all 'rainy day' money can be paid into a mortgage, knowing that is can be accessed if needed. Or it can be used to save money for a specific purpose, such as a car. Competitively priced loans with redraw facilities are increasingly common, but they could still end up costing more.

Points to note: redraw facilities often:

  • Charge a fee for each withdrawal
  • Set a minimum amount for each redraw, and
  • May limit the number of redraws per year.

Consider how often you are likely to 'redraw' your money before deciding whether this feature suits you.

Mortgage offset

Mortgage offset can save you interest on your loan. The mortgage is linked to a savings account into which salary and other cash can be deposited and from which you can withdraw to pay bills, credit cards etc when these debts become due. For as long as money sits in the account, it is 'offset' against the loan and so reduces the interest bill.

Points to note: Mortgage offset loans:

  • Usually charge higher rate of interest
  • May impose fees and charges for the offset facility
  • May not fully offset the rate of interest on you loan. A 100% offset means your cash earns the same rate of interest as you pay on your loan. Many offsets are partial. For example, if the offset account only attracts 3% interest while your loan attracts 7%, then your interest reduction will be less than half.

Offset account only work while cash sits in the account and the savings can be relatively small. For example, suppose your monthly payments are $675. (roughly the repayment for $100,000 borrowed at 6.5% for 25 years.) To earn just one extra monthly payment of $675 each year from the offset account, you would have to deposit $10,384 and leave it untouched for a full year - and that assumes you get a full offset, earning interest at the same rate as that charged on the home loan.

4.Make extra repayments

The most common mortgages for home buyers require 'principal and interest' to be paid. On a typical 25 year mortgage, anything extra paid in the first 5 - 8 years (when most payments go to pay off the interest) is especially good at cutting the interest bill and shortening the life of the loan.

Dollars in your wallet always seem to find a way of getting spent. Dollars paid into your mortgage cut the interest bill, and take years from your loan, especially if you start in the early years. They can provide a better 'return' than most investments, especially f you take into account the tax you would have to pay on any investment returns.

Extra payments in the last stage of a mortgage are less effective n cutting a lot of time from the mortgage, because most repayments pay off the principle, with comparatively little needed to cover the interest. But extra payments still save interest.

Check if your loan will allow extra payments and if there are any fees for doing so. Home loans with fixed rates may not allow extra payments or, if they do, will commonly limit the repayment amount over the life of the loan. Also, find out if you have to pay any fees for paying out the loan early.

One simple way to get ahead is to pay the loan fortnightly instead of monthly. In effect, you will be making the equivalent of 13 monthly payments a year instead of 12. Fortnightly payments will have the effect of cutting four years from a 20-year home loan of $200,000. If an extra $100 per fortnight can be paid, seven years will be cut from the loan.

If you have some money to spare, consider reducing your loan balance. Paying $1,000 on a credit card charging 16% interest obviously beats putting the same money into a term deposit earning 5.5%.

Also, remember the effect of tax. Paying $1,000 off a loan charging interest of 6.5%, saves a full $65. Money invested somewhere else earning $65 would result in a tax being paid.

This article is reprinted from our quarterly published "Financial Matters" Newsletter, Spring 2006 issue.

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