Despite falling interest rates, with the prospect of more rate cuts to come, one of the biggest expenses for many of our clients is mortgage repayments. Whether you are buying your own home, borrowing to buy a property in your self-managed super fund or borrowing to invest in property, interest represents a cost that should, like all costs, be minimised.
For an average mortgage of $350 000 paying interest of 7%, a typical repayment is $2 329 a month which, over a 30 year term, amounts to paying nearly ¼ of a million dollars in interest, or $488 280. With some simple changes you can reduce your interest bill and freeup cash for other purposes, like repaying your loan faster or increasing your salary sacrifice contributions to super. Here are some simple ideas for you to try:
1. Get a loan-check
It is worth reviewing your loan every few years to make sure you still have it working for you and need all the features you’re paying for. Our in-house mortgage broker can help see if you can save money by getting a better deal for your current lender or perhaps switch to a better deal. For example, nobody should be paying interest of 7% pa anymore.
2. Use an offset account
An offset account linked to your loan can save significant amounts of interest over time as you pay interest on the net outstanding balance. For example, instead of holding your $10 000 rainy day cash in a high interest savings account, on which you receive interest subject to tax at your marginal rate, you can reduce your interest bill by rather holding your emergency cash in an offset account. This simple step results in repaying your loan 2 years 7 months sooner and saving $64 099 in interest over the life of the loan.
3. Round up repayments
By rounding up your required repayment by even small amounts you can save a lot of money in the long-term. For example, with a $350 000 loan with a 30 year term and 7% interest rate the standard repayments would be $2 329 a month. If, after 5 years repayments are rounded up to $2 500 a month the loan would be repaid four years sooner and save $69 200 in interest.
4. Increase payment frequency
A popular way of paying a mortgage off faster is by cutting the monthly repayment in half and then repaying that payment fortnightly, which is another way of rounding up repayments. For example, using the $2 329 monthly repayment example from above, halving the repayment would result in paying $1 165 each fortnight. Since a month is more than four weeks long (averaging 4.3 weeks a month), the new repayment results in paying $30 277 a year instead of the standard repayment of $27 948 a year. The effect of the extra repayments is to repayyour loan 6 years and 3 months faster, saving $119 474 in interest over the life of the loan.
If you would like help with a loan check from our in-house mortgage broker, Clarence Street Mortgages, please feel free to call Fred Monteiro on 02 9299 7044.
We can also help arrange finance for those seeking to borrow to buy an investment property through their SMSF or outside super.
For help and advice on buying an investment property through your SMSF please feel free to contact our Partner – Wealth Consulting, Michael Rees-Evans CFP®, who is also a SPAA SMSF Specialist AdvisorTM, on the same number.