Lenders won’t tell you about it and many brokers charge a kings ransom to show you how.
There are companies that will charge up to $5,000 plus a monthly management fee to do what I am about to show you. It is simple to do but requires discipline and a good mortgage consultant to set it up correctly.
Generally speaking it’s usually a great idea to pay your home off as soon as possible because the associated interest and costs do not have any tax benefits. There are some exception though like:
renting out part of the home
using part of the home for business purposes
using trust structures to refinance the property
Many property investors prefer to reduce their mortgage and create more equity in their own home which can be used to purchase tax effective investment properties. It can be shown that contributing extra to pay off your home mortgage sooner is more like a savings plan than wealth creation. We will not get into that discussion here except to say that there are wealth creation strategies which actually work better if you don’t reduce the home mortgage.
The most common strategy to reduce your mortgage sooner is to increase the amount of your repayments and make those payments more regularly. But this usually means having to do without as you hand over more of your money to the Lender. In this scenario you are working for the Lender.
An alternative strategy - have the Lender work for you which is working smarter rather then harder.
Shop around for a lender that has better terms and conditions than you have currently such as:
lower interest rates
lower or no monthly fees
no charges for transferring money between account within the same bank
offset account facility
Line of Credit (‘LOC’) facility at favourable rates and terms
Ability to make extra payments with fees or charges
No penalties for early discharge
Option to go from Principal and Interest to interest only with minimal fees or charges
Credit card with interest free period (55 days is ideal)
You may use the services of an experience mortgage broker or you can do the investigation yourself. Write up the results in an easy to read spread sheet.
When you have completed step 1 then go back to your existing Lender and present them with the best deal available to you from another Lender.
If the Lender doesn’t come to the party then take your business to the new Lender.
Restructure the home loan with an Offset Savings Account. This balance in the loan account is reduced by the amount held in the Offset account so the daily interest charged in the loan account is on a reduced balance. Eg. if the loan balance is $300,000 and the amount in the Offset account is $4,000 then the interest charged on the loan account is on the $296,000 ($300,000 - $4,000) and not the $300,000.
Consolidate all debt into the home loan, eg. car loan, boat loan, personal loans, outstanding credit and store card balances etc.
Set up a credit card with interest free period that will automatically deduct payment from the offset savings account at the expiry of the interest free period.
Set up a Line Of Credit ('LOC') which provide easy acces to funds for a rainy day.
Pay all income into the Offset Savings Account
Have the home loan payments deducted from the Offset Savings Account at the end of each month
This strategy is only as good as the person applying it. It is essential that:
all your income is deposited into the Offset savings account
there is enough funds at the end of each period to payoff the credit card
you are disciplined enough not to spend beyond a predetermined limit each month
the LOC is only used for emergencies or to acquire wealth creating assets
That’s all there is to it…simple isn’t it! The hardest thing is to resist the temptation to use the LOC to buy that boat of holiday that you’ve always wanted. Remember, if you can stick to the plan and invest only in good investments then you’ll be mortgage free sooner and the money that you’ve been using to pay your mortgage can now reward yourself and spend it on the things that you want like that holiday or boat.
The above process has been simplified in this mortgage reduction flow chart.