For those looking to get out of debt quicker, a mortgage broker has explained a remarkably simple trick to pay off a home loan sooner.
In a conversation with nestegg, Two Red Shoes’ mortgage broker, Rebecca Jarrett Dalton, explained how mortgage-holders should switch their payment cycles.
“The quickest way to pay off a [mortgage] is weekly or fortnightly repayments,” Ms Jarrett Dalton said.
Ms Jarrett Dalton pointed out that this is because interest is calculated on a daily basis.
“Most banks calculate [a weekly or fortnightly repayment] by taking the monthly repayment and dividing it by four or two.”
“But there’s actually more than four weeks in a month and more than two fortnights. So, you accidentally pay 1/12th of a month extra repayment and that is a whole month of extra repayment in a year,” Ms Jarrett Dalton said.
These small changes create a compounding effect on the loan, due to interest being calculated on daily outstanding balance as well as an accumulative effect of a whole month’s repayment each year.
“An average loan of $400,000 will save about five years and $80,000 on interest,” Ms Jarrett Dalton explained.
For those looking to pay off a loan even quicker, Ms Jarrett Dalton said investors could make small additional repayments.
“If you can take it a little further and add $20 or $50 and bump it up, you’ll be able to pay it off even faster,” Ms Jarrett Dalton said.
“An offset account can be really effective if you have a large enough sum of money.”
“Another really effective way, and I’ve done this myself, is sending base income to the spending account and anything over base to go straight into the home loan.
“Most of us don’t rely on that variable income for our weekly budget, so it’s spare. If you haven’t seen it, you haven’t missed it,” Ms Jarrett Dalton said.
She explained that investors in a low interest rate environment where savings rates might be below 2 per cent, mortgage-holders are better off using additional savings to pay down their mortgage.
“I call this supercharging. You can have your money sitting in a savings account and earning at the most 1-point something, or the flip side, if you have a loan, your saving interest that could be almost double.”
“There’s also no tax on interest that you save, but of course you have to declare any interest earned on your tax return,” Ms Jarrett Dalton concluded.
If you have any questions or concerns about your existing loans, need further guidance on hardship assistance, or have other questions about your loan arrangements, you can arrange a convenient time to speak to Jesse Bruno, our mortgage broker at CentraMoney by clicking here