Lesson 7: Reducing debt
Reducing the mortgage
It is by now fairly common knowledge that if you pay your mortgage fortnightly or weekly rather than monthly, you will pay an extra months' mortgage each year without even trying. This can wipe tens of thousands off your mortgage, and reduce the term by years. If you can do nothing else, do this.
Budget to pay as much more as you can afford, rather than paying the minimum amount. Even paying an extra $5 a fortnight more than the minimum can save years off a mortgage. Not only that, but if you hit hard times (through unemployment, for example) then if you are ahead on your payments, you may be able to stop paying for a time without losing your home. (I know of one woman who was paying a mortgage on just her own income. She was unemployed for a year, but her mortgage was so far ahead she did not have to make a single payment. At the end of the year she was still ahead.)
Make sure your mortgage is adequately covered by insurance. If you lose your job, or have an accident or long illness, the last thing you need is to lose your home at such a stressful time. Saving on insurance is a dangerous false economy.
Check with your lender if there are penalties for paying your mortgage early. Even if there are penalties, you are probably still far ahead if you do pay up earlier anyway. It's unlikely the penalty will be anywhere near as great as the savings you'll make.
Every time you have a windfall (such as a tax return), lotto winnings, and so on, put at least some of it into the mortgage.
Think very carefully before adding loans for items such as a new car or holiday to your mortgage. It may seem like a good idea because the interest on the mortgage is much lower than the interest on a personal loan. However, you'll be paying for the holiday or car for perhaps 25 or even 30 years! Over the period of the mortgage, the amount you'll actually pay is astronomical.
If you're still considering adding a loan to your mortgage, use the free calculator at the Mortgage/Loan Calculators to find out how much you will actually be paying.
Think carefully also about redraw facilities and equity loans that allow you to treat your mortgage as a 'bank' you can draw on when you need funds. While these loans have an advantage (because mortgage interest is lower than personal loan interest), they are so easy and convenient that you are likely to use them, especially for big items like a car. This will effectively wipe out any extra you've paid into the mortgage, and will extend the period you're paying.
If you can stick to your budget and restrain your spending, an equity credit loan can be a good option if you have your salary paid into it, and withdraw funds for your budget items. But you need to stick carefully to your budget!
It is worth checking out the various mortgage options and thinking about them carefully, but whatever kind of loan you have, the faster you can pay it off, the better off you will be.
