Australians are the second-largest debtors in the world, closely following Switzerland. The majority of the Australian debt comes from mortgagors – people who take credits to pay for their home.
This is no surprise when you consider that the average price of a home in Australia is over $850,000. An expensive home comes with a massive disadvantage to people who use mortgages: it increases their debt exponentially, especially when paired with compound interest.
A large debt with a high interest rate can turn a “decent” home loan into a life-sucking problem.
Fortunately, it doesn’t have to be that way. With the methods below, you can find a way to reduce those interest rates, pay your mortgage quicker, and effectively reduce your household debt. Let’s help that money stay in your wallet, and not the bank’s! Here’s what we recommend:
1. Pay off your debt quicker
The majority of mortgages offer low repayment plans over long loan durations. Although seems appealing at the outset (since the repayments are so low), this is in fact a tactic used by the banks to get you to pay your loan slower. For this reason, half a million Australians in their 50s and 60s are retiring with huge mortgage debts.
One of our prime missions at Raeburn is to help people retire without debt. We believe in working hard, investing smart, and enjoying your retirement. Having an outstanding mortgage to pay in your later years can prevent you from retiring at all, keeping you grinding away to service your loan even in retirement age. It also increases stress rates and makes a supposedly calm period of your life into a potential nightmare. Finally, it’s possible you may leave some of the debt behind, meaning your children may have to carry the burden when you die.
The solution? Pay off your mortgage faster by making larger repayments (not just the minimum).
Instead of spending money on unnecessary expenses, you can use it to save for a lump sum and then pay off your mortgage before it is due. This is especially true when you receive substantial sums, like annual bonuses, inheritances, tax refunds, insurance payouts, and even cash gifts.
Regardless of where it comes from, managing your cash flow appropriately will make it easier to pay for your mortgage quicker and go into retirement debt-free with whatever excess of income you can get. As little as $50 saved every month can help you pay for a mortgage a lot quicker. Remember – the faster you pay it off, the less interest you’ll get charged.
ALSO READ: The Truth About Retirement Age in Australia
2. Choose a home you can comfortably afford
Did you know that the average home in Sydney costs a whopping $1 million? If you want a house like that, you’ll need a yearly income of at least $160,000 to be approved for a mortgage plan.
To successfully have your dream home mortgaged, you need an average income of at least 15% of the house’s price. For example, if you want a home that is worth $400,000, you’ll need a yearly income of no less than $64,000.
These prices and income requirements can induce a lot of mortgage stress, especially if debtors lose their jobs or suffer other financial setbacks. So, what’s the solution? The obvious one would be to buy a house that’s in line with your ability to pay for it comfortably. In other words, buy within your means. You don’t want to be saddled with debt if an emergency arises.
ALSO READ: The Importance of a Healthy Savings Habit
3. Use shorter payment terms
Mortgage repayments are configured to monthly by default. If you’ve never given this a second thought, this is the time to.
Choosing to pay your loan weekly or fortnightly can save you a significant amount of interest in the long term. While the year has 12 months, it also has 26 fortnights and 48 weeks. If you choose to pay in shorter increments, you’re reducing the size of your loan 26 or 48 times per year, instead of 12, and since interest is normally calculated daily this helps reduce your ongoing liability each time you make a repayment.
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4. Get the right mortgage provider
One of the main problems with interest rates is how much they can increase an already inflated debt. At time of writing, the average mortgage interest rate is 3.29%, according to Canstar. If you take out a mortgage of $500,000, you can expect to pay $15,000 of interest per annum on average.
However, some lenders may have an interest rate upwards of 5.49%, which means you’ll be paying $27,450 in interest as well as your principal repayments.
Luckily, some lenders offer interest rates as low as 2.6%. Even better, other lenders are being pushed to lower their interest rates, which may be reduced to as low as 1.9% for 4-year mortgages. Following the example above, a 1.9% interest rate would increase your repayments by only $9,500 per year.
The moral of the story? Shop around for the best rates. Yes, you may be charged a ‘break fee’ by your existing loan provider, but it’s often less than the amount you’ll be able to save by switching to a cheaper rate anyway.
And before you ask – should I go Fixed or Variable? – the answer will depend on your circumstances, and we’d be more than happy to give you more detailed advice in a free strategy session.
5. Have a financial plan in place
Lastly, consider how fast home prices are growing. Since 2000, the average home price has increased by over 150%. Heck, in the last quarter alone prices went up by 4.1%!This means that regardless of what mortgage you choose and what house you buy, there’s a good chance it will increase in value.
What does this mean? As long as you follow a financial plan and an efficient wealth management system, paying for the mortgage consistently and preventing the interest rate from eating away your savings will be easy.
No artist, athlete, or entrepreneur achieves success without first having a plan. The same applies to your finances and the tiny but essential things like paying for your mortgage in as strategic a way possible.
Developing a financial plan seems daunting and complicated for those who haven’t done it before. We simplify the process and dispel the jargon and misinformation that plagues the industry to help you effectively manage your finances.
At Raeburn Advisors, we can build a strategy for your mortgage payments, look at reducing interest rates, and help you pay your home loan a lot faster than you would typically do. More importantly, we’ll help you create goals and habits that will make your financial life a lot easier.
Book an appointment with us right now and let’s figure out the best way forward to meet your financial goals. We’ll help you build a robust financial plan for all your endeavours.
This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.