How to quickly slash your mortgage debt in 2020
Mortgage customers should maximise record-low interest rates in 2020 and reduce their debt as quickly as possible. These are some of the best ways to do it.
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MORTGAGE customers have the perfect opportunity to drastically reduce their loans
in 2020.
Experts predict there will be further rate cuts this year, reducing the record-low cash rate from 0.75 per cent even further.
For borrowers wanting to get ahead on their loans there are some simple tricks to slash debt.
1. PAY OFF HIGH INTEREST DEBT FIRST
Credit cards and personal loans attract interest rates that are far higher than mortgage rates.
On many cards rates are above 20 per cent while personal loan rates are often north of 10 per cent.
Mortgage Choice broker James Algar said borrowers should focus on paying off their high-interest debt first before tackling their mortgage debt.
“We still get people who are overpaying their home loan but have money outstanding on a credit card – there is absolutely no sense in that,” he said.
2. CHECK YOUR RATE
There are owner occupier principal and interest mortgage deals under 3 per cent for both fixed and variable loans.
Mr Algar said borrowers should be chasing deals as “close to 3 per cent” as possible.
“If you are paying more than 3.3 per cent on an average loan of $500,000 you will save enough money to offset the cost to move if they have to switch lenders,” Mr Algar said.
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3. PAY EXTRA
While rates are low it pays off to tip extra into your loan so you can chip into the principal.
The Reserve Bank of Australia’s latest biannual stability review shows borrowers are on average 2.5 years ahead of required mortgage repayments at existing interest rates.
This includes money held in offset accounts or redraw facilities.
ING head of retail bank Melanie Evans said 34 per cent of its mortgage borrowers were more than six months ahead, while 46 per cent were more than one month ahead.
On a $300,000 30-year loan on a rate of 3.5 per cent, if a customer pays an extra $50 per month they would cut one year and nine months off the loan term and save $12,700 in interest costs.
If they paid an extra $200 per month they would save $42,000 and cut six years and one month off the loan term.
4. USE AN OFFSET ACCOUNT
Keeping money in an offset account – a daily transaction account linked to a home loan – significantly reduces interest costs.
For instance, on a $300,000 loan if a customer had $10,000 in an offset account, interest would only be charged on $290,000.
Ms Evans encouraged borrowers to “pay all your salary and any excess savings into one offset account”.
But she said customers needed restraint because it could be “tempting to dip into your savings”.
Redraw facilities – where excess money paid on the loan builds up – could be tempting to spend, but once this money is withdrawn the loan balance increases.
SMASH YOUR MORTGAGE
• Check your interest rate.
• Pay more than the minimum repayment.
• Pay weekly or fortnightly not monthly.
• Use an offset account.
• Look to refinance.
• Don’t get sucked in by cashback deals.
• Get a shorter loan term.
• Tip any excess cash into your mortgage.