On the up: What will higher interest rates mean for real estate investors in New Zealand and further afield?
The Land of the Long White Cloud is shaping up to raise rates and the country may well be a bellwether for the Australia...
You may have done your due diligence before you signed on the dotted line, but there are some secrets that could have you laughing all the way to the bank.
Blogger: Helen Collier-Kogtevs, managing director, Real Wealth Australia
Mortgages are part and parcel of home ownership. These loans can stretch out for 30 years and could see you paying twice as much for your property in the end.
However, there are some little secrets that can help you beat your mortgage. Surprisingly, several of these tips come straight from your lender. So let’s shed some light on a few things you may not know about your mortgage:
1. In the beginning, you’re mostly paying the interest on your loan
Initially, if you have a principal and interest loan, the majority of your repayments are paying back the interest portion of your loan, with only a little going towards knocking down your principal. As your loan term goes on, more of your repayments go towards the principal portion.
That’s why extra repayments right from the beginning are so important: they pay down your principal earlier, which reduces the amount of interest you’ll pay overall.
Here’s an example to show you how effective these extra dollars are:
Let’s say your mortgage is $430,000 and the interest rate remains at 6 per cent over the term of the 30-year loan. By throwing an extra $50 a week at your mortgage, you would cut 5.5 years off the term and save a whopping $106,500 in interest.
2. Paying weekly instead of monthly will shorten your loan term
When you pay weekly, you’ll make more payments per year and continually reduce your principal, which equates to paying less interest over the life of your loan.
3. You can negotiate a discount
Did you know you can negotiate a better deal with your lender? Find out what other lenders are offering and don’t forget to check out credit unions and building societies too, who often throw extra features into the package.
Then it’s a matter of approaching lenders to see if there’s wiggle-room in the interest rate or payment terms. You might be surprised by your bartering power!
4. You can use bank accounts to offset your loan
An offset account is the simplest and most effective method lenders give you to pay down your mortgage faster. Your offset account acts as your regular transaction account with all your incoming and outgoing monies, but every dollar in that account acts as a ‘payment’ on your loan.
If you had a $300,000 mortgage and $50,000 in a 100 per cent offset account, interest would only be applied to $250,000 of your loan. That equates to some nifty savings, with no effort required on your part!
5. Loan packages with money-saving extras
Shop around a bit and you’ll see that some lenders package their loans with extras that you can use to your advantage. These might include fee waivers, credit cards with no annual fees, and discounts on home insurance.
If you can trust yourself with it, a credit card is a very effective tool when combined with your offset account, because you can use it to buy all your day-to-day expenses and pay it off before the end of the interest-free period each month.
That leaves the maximum amount of money in your offset account for the maximum amount of time, which lowers your principal.
See how easy it is to use what the lenders give you to your advantage? Of course, if you can’t be trusted with a credit card, then it’s best to leave it at the bank!
As I always say, if you can’t afford to pay off your credit card in full each month, then you can’t afford your credit card at all.
6. You can get a refund on your Lenders Mortgage Insurance
If you’ve had to pay LMI because your loan is more than 80 per cent of the value of the property, you can request a refund if the loan is paid out in the first two years (say, if you refinance or sell your property). The refund can be anywhere between 20 per cent and 40 per cent of the LMI amount. But you won’t get it if you don’t ask – and 99 per cent of people don’t know they can ask!
7. Lenders are counting on you to forget about your mortgage
If you pay your mortgage off the way banks want you to (monthly, minimum payments over three or so decades) you’ll likely pay double the value of your loan. Out-smart the banks by using these tips to pay down your loan smarter and faster.
Stay informed and keep an eye on your mortgage, interest rates, current marketplace trends and lender incentives. By being diligent, you can shave years – and thousands of dollars – off your loan amount.
Until next time, happy investing!