*this article first appeared in the October 2018 Midland Express
The uncertainty of interest rates, as well as job instability, means that many people are wondering if they can shrink their mortgage quicker and buy themselves some financial freedom.
There are some really simple ways to quickly cut down on how much you owe on your mortgage beyond just making extra repayments. Many home loans already have features that can assist you but if they don’t, refinancing might be something to consider if drilling down on the debt is a goal.
A common approach to speeding up the decrease of a home loan is to increase payment frequency. A fortnightly or ‘bi-monthly’ payment can save tens of thousands of dollars in interest charges and reduce your loan term. The standard monthly repayments not only assist in the reduction of interest charges but the fortnightly payments mean you are making 26 fortnightly payments as opposed to 12 monthly payments, meaning you are sneaking in a few payments per annum. Smart!
Also understanding how interest works is another benefit when reducing your mortgage quicker. The interest on your mortgage is calculated on the outstanding balance every day. This means you can reduce the amount of interest you pay overall by increasing how often you make a payment on your mortgage.
It is important to understand the features of your mortgage as well. An offset account is an incredible way to not only save some cash for home expenses or holidays, but that savings will also be working for you. For every dollar you leave in your offset account, it actively reduces the amount of interest you pay on your mortgage. For example, if your mortgage is $300,000 and you have $10,000 in your offset account you’ll only pay interest on $290,000.
The best way to do all of this is some simple number crunching and to understand what a few extra payments can do to give you the freedom you desire.
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