For most people, a home loan is the largest investment they will make in their lifetime—and paying off the massive loan can be equally as daunting. Here are 10 ways to reduce your mortgage fast, saving you on stress and interest.
When choosing a home loan, it’s not always simply about interest rates; instead, select one that better fits your needs and suits your goals and lifestyle. Home loans with an offset account, for instance, could bring with them higher interest rates than other products but might save you more money in the long run by offsetting funds in your transaction account against the loan.
Early on, most lenders may offer attractive introductory rates, switching to a higher variable interest rate after the initial period ends, typically after a few years. It’s important to keep an eye out for these introductory rates since the variable rate will dictate your repayments for up to the next 30 years. Additionally, you may be forced to pay heavy exit fees if you switch to a lower rate in that fixed-rate period.
One tried and true way to reduce your mortgage fast is to pay extra, whenever you are able, in addition to your monthly repayment. Usually, lenders will allow you to make bi-weekly or weekly repayments instead of monthly repayments, and since Jan. 10, 2014, most mortgage loans issued don’t charge for repayment penalties. Instead of simply covering the interest, extra repayments go toward paying off the principal, lowering the amount you owe. Typically, you are charged less interest if you owe less principal.
It is common to ask for alternative financial packages from lenders, including fee-free credit cards, discounted home insurance, a fee-free transaction account, or free consultations with financial advisors. Even though some of these offers might sound like small potatoes while paying on your home loan, every saving counts.
Rising interest rates do not only impact your home loan—you could see the rates on forms of credit such as car loans, personal loans, or credit cards rise as well. That might make it hard to stay on top of all those debts.
If this happens to you, you might consider consolidating your debts into a single streamlined repayment. Doing so could be especially beneficial because interest rates on credit cards and personal loans can be quite a bit higher than your home loan rate. But be sure to double-check to see if breaking existing loan contracts will cost you in exit fees. Debt consolidation is not always the cheapest option.
This is a transactional savings account connected to your home loan. The balance of the offset account is usually deducted from the principal amount owning when the interest on your home loan is calculated, reducing the interest you are charged and helping you to pay off your interest and principal home loan more quickly.
To potentially cut years off your loan and save in interest charges, you could consider finding a new lender with lower rates—but first be sure to figure out the cost of switching loans. In addition to possible establishment fees to switch to a new loan, you may also be on the hook for costly exit fees payable on your current loan.
One way to make an extra mortgage payment each year is to cut out your less important expenses, which can add up significantly throughout the year. You can also ensure you keep track of your home services by comparing your internet providers, gas and electricity, and even by looking at your health insurance. This should help you figure out where to make cuts to your expenses that you can then use as that extra mortgage payment.
Another strategy that could help you here is simple yet effective: considering bi-weekly payments versus monthly payments. Since there are 26 fortnights per year and just 12 months, you will be making the equivalent of 13 monthly payments. This will chip away at the interest and the principal.
If you have earned a large bonus or commission cheques, inherited money, or sold a different property, you could then apply the proceeds to your principal balance. Lump-sum payments may be the next best thing in the case of VA and FHA loans, which can’t be recast. You will have to specify if extra money is to be added to the principal with some mortgage servicers. If that’s not the case, you could split the extra money between the principal and the interest, since it’s divided in monthly mortgage payments.
Since you keep your existing loan, mortgage recasting is different from mortgage refinancing. For mortgage recasting, the bank will adjust your payoff schedule to reflect the new balance after you have paid a lump sum toward the principal, resulting in a shorter-term loan. The fees tend to be lower when recasting—a major benefit. By comparison: recasting fees usually run a few hundred dollars while refinancing fees can run in the thousands.
