Financial Goals for 2021: 3 steps to shorter terms

Get that home loan down while rates are at all-time lows!

It’s that time again where many people have looked ahead and thought about what they wish to achieve for the year. For those with a mortgage, I challenge you to consider how you can pay your debt quicker and save interest and years off the time you have the home loan. When setting financial goals there’s none better than trying to pay off your mortgage faster. So here are some tips on how to do just that.

1) Reduce coffee spend, and save up to $52k

Firstly, make extra payments if you can afford to do so. Increase your mortgage payments to reduce your interest cost and pay off the loan earlier. Most banks will allow you to pay extra even when you have a fixed interest rate. 

There are different rules from different banks. For example, some will allow you to make a payment of up to 5% of the balance in a 12-month period. So, if you have a mortgage of $400,000, you can make lump sums of $20,000, or you can take that $20,000 and spread that across all of your weekly payments over a year.  One of our other lenders allows you to increase your payments by 20%, and another allows you to increase your payments by up to $500 a fortnight. So, different rules for different banks, but all those rules allow you to make extra payments when on a fixed home loan. 

For example, here is what you could save with extra payments:

If you had a $400,000 loan at 2.5% on a 30-year term and you’re paying weekly payments, your repayments would be $365 a week approximately. If you could afford to cut back on the coffees and discretionary spending and pay an extra $100 a week you would save $52,000 in interest and pay the loan back 8 years earlier. So, some substantial savings could be made if you’re in a position to make extra payments. If you can make those extra payments from the start that is the best plan as it can reduce the mortgage sooner. 

It’s quite acceptable to hold off paying extra payments as soon as you buy a new home. Allowing your finances to settle into a rhythm and getting used to paying mortgage payments, the rates, the house insurance and so on is fine. However, the sooner you feel in control and can look at what you can increase your payments by the better. In reality, any time is better than never to increase your mortgage payments.  

Have a good look at your spending habits and see where you can reduce expenditure in other areas. If you’re smoking you might want to consider reducing what you smoke or stopping, stop buying drinks at the expensive bars, or buying coffee from a café Monday to Friday. We all enjoy meals out, but cut them back to once a month. Cancel subscriptions that don't do a lot...this all adds up. Decreasing this expenditure can create extra surplus in your budget and give you the chance to consider putting these savings toward repaying debt and achieving some financial goals.

2) Look at what products your bank offers

Things such as offset loans and revolving credit loans are of benefit, but they are only useful to specific clients with specific strengths in terms of their savings and incomes, so you would need advice specifically to see if that works for you. It's certainly worth considering, so reach out to discuss how this could work for your specific situation.

3) Plan for interest rates to rise

Don’t lower your repayments when interest rates fall. At the end of your fixed-rate, you might be coming off an interest rate that’s 3.2% and going on a new interest rate of 2.3%. Therefore, keep your repayments at the same level and get the benefit of paying that loan off faster based on the fact you have a reduced interest rate. 

The key here is that interest rates are at historic lows, at the time this article was written at the end of January 2021, they are sitting as low as 2.29% fixed for 1 year. 

There is no better time to make additional payments and get ahead of the curve. In the future, if you need to reduce your payments, or interest rates go up, you can be ahead of the expected initial time frame to repay the home loan. This will save you interest, get rid of the debt sooner, and allow you to have some financial freedom.

So good luck with your financial goals in 2021 and I am always only a phone call away to discuss your individual needs.   

- Simon Maule