Three simple debt reduction strategies to take you from D'oh! to Pro
It's important to stay on top of your money situation and know what you owe.
It's better to actively seek ways to reduce your debts that don't create havoc with your budget, but help you get ahead with minimal effort.
Here are some Debt Reduction Strategies you can employ now or plan for in the near future:
1. Refinance your home loan to find a better deal
Actively seeking a better home loan deal and the merits of putting the savings straight back into the loan to compound the savings
So let's say you pay $2000/month for your home loan now, but by refinancing your broker finds you a cheaper deal for, say, $1900/month. If you kept paying in the $2000, then you'd get further in front each month.
By finding a deal that is cheaper and maintaining your current repayments, you can attack your loan with no more effort than your current deal, but pay off your home sooner.
Pro Tip: You can set up your mortgage repayments to be automatic payments of more than the minimum repayment in the account settings of your loan, or by calling your lender to make the changes for you, then forget about it and be pleasantly surprised when you next statement shows you've paid off more of your loan this year than last year.
2. Once-off Extra Loan Payments
Additionally, you could pay your tax return money straight off your mortgage, and the same goes for any bonuses or pay rises. Once off cash injections, or regular chunks if you do this every year, can make a huge dent in the time it takes to pay out your loan.
If you have kids, then you can use your family tax benefit correction payment from Centrelink, if you get one, and if you don't need it for other things straight away.
Even a regular increase of $50 a fortnight makes a huge difference.
Sell something you no longer need on gumtree? Then you could pop the proceeds into your offset account.
3. Switch to Fortnightly Repayments
By the power of mathematics, if your mortgage repayments are monthly then you're making 12 payments a year. But, if you switch to fortnightly repayments and continue paying half of your monthly repayment each fortnight, then those 26 half payments are equal to 13 calendar monthly payments.
So, from January to December you end up making the equivalent of 13 monthly payments rather than 12, which means you pay off more and save interest on the balance.
WARNING - Care is required when making this change - you need to ensure that your new fortnightly payment amount is your current MONTHLY repayment amount is divided by TWO. So you are paying half of your previous monthly amount each fortnight from now on. Please don't ask the bank to work out the fortnightly payment value for you, as they may give you the fortnightly equivalent amount which would leave you repaying your loan over the original term, and not reducing the time frame to repay your loan.
How much difference could this tweak really make?
In the following example, you can see how by paying off the loan with one extra month's payments you can reduce the loan term and save overall interest.
This example is for a principal and interest loan of $400,000 at 4% interest, paid off at $2000 each calendar month. The expected term is 27 years and 7 months, with total interest of $260,265.38 over the life of the loan. Assume also that no extra repayments are made over that period.
Then, if we change the payments to $1000 a fortnight, the loan could be paid off four years earlier (in just 23 years and 6 months), and saving $38,705.35 in interest, which could be spent on something else instead of being handed to the bank.
The question then is: Can you afford an extra $2000 out of pocket each year to add to the home loan without affecting the household budget?
What could you do with almost $40,000 in saved interest? It's the equivalent of a salary for 6 months to a year, so you might consider whether you need to work so much? You could put that money earned to better use yourselves.
Pro Tip: As you see your available redraw funds grow, please don't be tempted to use these funds to buy anything, leave them in the account doing their job of reducing your loan term, or you will go back to paying off the loan over the original term.
It takes discipline to leave the funds in the account, but some lenders may allow you to create separate offset accounts, or hide your redraw funds balance from your account summary online if you need to create some distance from the bank balance to make this strategy work.
Consider using a combination of these strategies to chip away at your home loan, and by harnessing the power of compound interest and fiscal discipline you could own your own home outright many years sooner.
Tell me how you get on applying these strategies, or better yet get in touch so I can help you.
If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email [email protected] or send us a message via our website for a quick response.
Bob Malpass 0431 862 136 or [email protected]
Thanks for reading,
Bob
