I think most of you will agree that the biggest money pit for you is your home mortgage. It therefore makes sense that saving money on your mortgage becomes a priority before anything else.
In Australia, mortgage expense usually accounts for the largest portion of a household’s disposable income. In some cases accounting for 45-50% of income.
Sadly a large number of people don’t really know how much it will cost them over the life of the home loan.
The reality is that if you take 30 years to repay your home loan, then your interest cost will be as much as the original cost of the house.
Average house price in Australian cities is around $700K. With a 20% deposit and an average interest rate of 6% (remember its 30 years and today’s low rates will not last forever) – the total interest cost over 30 years will be approximately $650K. The original $700K house will end up costing you more than $1.3 million and this is not including other costs such as maintenance, insurance, rates etc.
The good news is that you can reduce this cost dramatically by making changes in how you treat your mortgage.
In this article, I will show you how saving money on your mortgage can shrink tens of thousands dollars in total expenses. In our case, it was hundreds of thousands of dollars.
Why saving money on your mortgage is important?
Saving money on mortgages is going to be one of the biggest ways to turbo charge your way towards financial freedom…
I see people going to great lengths on saving money on coffee, food, transport, coupons and so on… Yet, they ignore the biggest expense – their mortgage. Being careful with money is important on all these smaller things too, but for your sake look at the thing that’s going to make the biggest difference to your finance.
If left on its own – the cost of mortgage is going to be as much as the original home. This will have a major impact on your wealth creation goals. Why ? Because until your own home is paid off – you are not really creating any assets that will fund your retirement.
Yes, your home will be a biggest asset line in your net worth statement, but unless you sell it – you are not going to generate any ongoing income from this asset.
Once the family abode is paid off – all of the free cash flow can be used to buy other assets which will fund your retirement. You can use this extra money to invest in shares, buy investment properties, fund your retirement accounts – invest in anything that makes you richer.
But most of all – it feels plain awesome to not have a mortgage…
By saving money on your mortgage, you can literally take years off your mortgage. We used every possible trick we could to save money on our home loan.
Eventually we repaid our 30 year mortgage in 6 years and saved more than a hundred thousand dollars in interest expense.
Read on for my top tips for saving money on your mortgage
#1. Buy what you can afford – It all starts with making the right buying choice. By buying cheap and a low priced home, you start saving on day one. This includes saving money by having a lower stamp duty; lower ongoing expenses such as maintenance, insurance and rates; and then continuing to save for the life of the loan due to lower interest expense.
But how do you buy what you can afford? By ignoring what the banks are willing to lend you. The fact is you can afford much less than what your bank is offering you. In working out what you can afford – stress test your borrowing capacity by decreasing your income (e.g. if you were to go from double to single income); increasing interest rates as they won’t stay low forever, budgeting higher lifestyle expenses and trying to keep your repayments to less than 30% of your household income.
Saving money on your mortgage begins with buying smart and CHEAP….
Let’s say you are buying a home for $700,000. Assuming you had a 10% deposit + costs – you will be paying an LMI of $21,000. And it doesn’t end here. The LMI gets added on to your loan and is paid over the life of the mortgage – In effect it’s capitalised on to your loan.
Over 30 years this adds up to total repayments of $45,000… Talk about dead money…
There is only one way to put this – if you can’t afford a 20% deposit, then you can’t afford to buy the house. Yes, you may get a loan from the bank and you may eventually pay off your home, yes your home value may rise and yes, everyone you know is buying without a deposit – BUT if your goal is saving money on mortgages then that is not the path to take. In some cases it may make sense to pay a small amount of LMI but that’s a seperate post… As a blanket rule though – LMI is dead money.
If you don’t have the deposit then continue with the basics – earn more money, save hard and invest in other assets while you build up 20% deposit.
The first two tips will help you cut your mortgage costs in the buying process itself.
Move to #3 once you get the first two tips in place. Because if you get these wrong and end up with mortgage stress even before you begin, then saving money on mortgages becomes really hard.
#3. Get an offset account – For all the banking industry’s faults – this product is a great innovation.
You get to keep your money liquid and get interest deduction on your home loan at the same time. You are effectively earning money on your investment tax free. As long as you have a mortgage offset account – there is no reason to invest in any other cash instrument such as term deposits.
Yes, investing in a higher earning asset such as shares can make sense but most people will do just fine not overcomplicating things and keeping their money in offset accounts.
The way we used our offset account was to get all our income credited directly to the offset account and then using the offset to pay for all our expenses. This way we made sure that 100% of our money was being used to offset mortgage interest expense.
Danger with this strategy is that if you are not disciplined – you will get excited by seeing a large offset balance and then spend your way into misery. If that sounds like you, set up a seperate account for your day to day expenses and only put into offset what you don’t need.
Always a choose a package with a free offset account.
NO Never pay additional fees for them.
#4. Make extra repayments from every salary – If you use the offset accounts the way they are to be used, then technically you don’t need to worry about extra repayments. Every single penny of yours in the offset is already saving money on your mortgage. And eventually your loan balance and offset balance will cross each other out.
You can then choose to repay 100% of your mortgage or keep the money in an offset for liquidity – This is the dream as it provides you free money i.e. a line of credit for which you don’t have to pay the bank anything.
BUT we are not rational all the time and none of us have army level discipline. Seeing a hundred thousand dollars or more in the offset will make you feel like a kid in a candy store. That’s why personally I like to repay a little bit regularly.
Bit by bit, dollar by dollar. Keep paying it off.
If you followed #1 tip, then you should have money left over to make additional repayments. Whatever it is – a few dollars or a thousand – it all adds up.
Lets see this in action for someone with a $700,000 house at 6% interest rate and 20% deposit.
a. $100 a month in extra repayments – interest savings of $58K and 2 years and 3 months on the original loan.
b. $500 a month – you end up saving $207K and 9 years and 3 months.
c. An extra $1,000 a month and its more than $300K in interest saved and you pay your mortgage in only 17 years.
Now I know, that most people cannot spare a $1,000 every month – but if you bought a house you can afford (#1) then you should not be under any mortgage stress and be able to afford at least a $100 a month in extra repayments. Try pushing it by depositing all your tax returns / bonuses and handouts directly to the mortgage. These can add to thousands of dollars.
How about saving hard on all those small things. Check my best money savings tips which can save you 1000’s of dollars each year.
#5. Refinancing and using a broker – Banks have a funny way of rewarding loyalty. It usually involves penalising existing customers and discounting rates for new customers. It’s really up to you to make sure you are getting a fair deal.
Banks are always advertising special rates for new customers. It’s your job to make sure you track those rates and get the possible deal for yourself. It shouldn’t be like this – but it is. We all have to fend for ourselves.
Using our previous example someone with a $560,000 loan – 0.5% reduction in interest rates will save you almost $64,000 over the life of your loan.
So keep an eye on the market. Do a quick check every now and then. Most time it makes sense to stay with your bank if they can match. If not, moving your mortgage is not hard. Keep a couple of good brokers on hand and this makes the job of monitoring the market easier.
While comparison, I always do a like for like comparison and look for the all in costs.
#6. Never redraw your mortgage – I don’t need to tell you how hard it is to repay your loan. You already know that. If there is equity in your mortgage – please don’t withdraw it to fund your lifestyle – to renovate, buy a car, european holiday. Thats how GFC happened.
If you can’t do those things without redrawing then obviously you can’t afford those things. Don’t buy into the false economy of spending to make yourself happy. The mortgage should only ever be repaid – never withdrawn and spent. Otherwise you will just keep on using it like a loan facility and still be paying it off in your retirement.
Saving money on your mortgage is not rocket science.
It’s not hard – all it requires is financial discipline. A lot of people fail because they blame others for their misery. Whether you like it or not the external environment will not change because you want it to change – house prices won’t come down because you can’t afford them and interest rates won’t reduce because you think they are too high.
It is what it is and NO ONE said becoming rich is easy.
You can’t control these things but you can control your own behaviour. Successful people don’t blame others but look for solutions. They change their own behaviour in response to what happens around them. So stop making excuses and don’t resign yourself to a 30 year mortgage. Take control and halve your mortgage cost.
You can follow the above suggestions in any environment. These are nothing but basics of good mortgage management. You can work it out for yourself but you can easily save tens of thousands of dollars on your home loan if not hundreds of thousands. The most important thing is changing your mindset.
What do you think of the list. Do you have any other suggestions for my readers to help them save money on their mortgage. Please share in comments below…