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‘Saving $1m in 5 minutes’: The strategies to slash your debt by thousands
Forget chasing lower home loan rates. As mortgage repayments keep surging, investors need a calculated approach to slash their debt and interest costs by hundreds of thousands. Here’s how to take control.
With mortgage repayments rising after a series of interest rate hikes and another increase looming, borrowers continue to face growing pressure to reduce debt and keep interest costs down.
Last month, the Reserve Bank raised the cash rate by 25 basis points to 4.6 per cent, increasing mortgage repayments and marking the highest rates since 2011.
Following the rise, Finance Differently founder Kat Marsalek said paying off debt faster could deliver greater savings over the course of a mortgage than simply chasing a lower interest rate.
Marsalek said many borrowers mistakenly believed refinancing was the key to reducing their mortgage costs, but this meant that many were neglecting other
“It’s the system that we play in. It means that no one’s really educating customers on how to cut down this non-deductible debt,” she said on a recent episode of The Property Nerds podcast.
Here’s how to take control:
Avoid the ‘refinance loop’ and ‘set and forget’ mortgages
According to Marsalek, borrowers often thought they needed to fight for the best home loan rate, creating a never-ending “refinance loop”.
While refinancing could be an option, she warned that chasing interest rates may distract borrowers from a more effective debt-reduction strategy that could relieve thousands more over the course of their mortgage.
“The reality is, if you cut your interest rate by maybe 0.05 per cent or something, the savings over the life of the loan or even in the first year might only be a grand or two,” she said.
“In the scheme of things, that isn’t moving the needle, but if you have a strategy, you can save hundreds of thousands of dollars and stick with your same bank on your same interest rate.”
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Marsalek said borrowers had also become passive in managing their mortgages, allowing banks to maintain full control while borrowers failed to actively pay down their debt.
“The 30-year mortgage was designed by the banks for a particular reason – they knew they could lend you a certain threshold where you have less disposable income to make extra repayments,” she said.
As a result, she said they took longer to repay their debt and ended up paying more interest over time.
“People have got their mortgage, they’ve got their repayment, the interest rates, they just try and get a good one every so often and it’s set and forget.
“What’s happened is that we have just given all control to the banks. They control the interest rate, they control how much we can borrow, they control the balance, and they’re controlling the repayment as well.”
Offsetting costs and restructuring loans
Marsalek said one of the key ways for borrowers to cut thousands in debt was to restructure their loan, rather than simply chasing a lower interest rate.
A home owner once wanted to upgrade his family home and already had a pre-approval with a competitive interest rate, but Marsalek said he could cut the debt.
“I said, I probably can’t beat that rate, but the amount of interest. And I brought up our software and showed him the amount of interest that he was due to pay, $1.3 million over the life of that loan,” she said.
She showed him a strategy involving taking his cash that was not offsetting the loan, and putting the money into an offset account against the mortgage.
She said the home owner would have paid more than double in total costs for the property and insisted it was possible to pay off a mortgage in eight years to reduce interest.
Marsalek said the second strategy involved restructuring the home owner’s investment property loan, which had principal and interest repayments at an interest rate of 6.49 per cent.
She suggested switching it to an interest-only loan at a lower rate of around 6.23 per cent, freeing up around $1,600 a month to redirect to his home loan.
“I said, if I redirect that off your home loan instead, so just keep the bad debt there, the net effect is the same. We’re still reducing debt, but we’re just reducing the bad debt.
“So when I showed him those two things, they cut his interest bill to $300,000. Two strategies out of 46 saved him a million bucks in five minutes.”
Listen to the full episode here
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