Repayment rescue: how to reduce your home loan debt

By Gillian Bullock

You can knock years off your mortgage by employing smart strategies including paying more than the minimum and making more frequent payments.

According to figures calculated by ratings house Cannex, if you had merely maintained the repayments you were making last year before interest rates started to tumble, you would end up paying out your 25-year mortgage in just 13 years. On a $300,000 mortgage that's a saving of $359,682 in interest!

Rates fell from 9.62 percent for the average standard variable rate last year to 5.76 percent currently. In dollar terms the minimum monthly repayments on a $300,000 loan have fallen from $2646 to $1797, so paying off the extra $848 a month can make a significant difference.

And in today's economy when many are realising that debt is a dirty word, any strategy that can reduce the amount you owe more quickly must surely be good news.

But even before you make your first mortgage repayment, you can also save money by making sure you have at least 20 percent deposit for your property. Not only does this reduce your future repayments but it can also help by removing the need to pay mortgage insurance. This is where the lender insists you take out insurance to cover them should you default on the loan. It can cost you several thousand dollars as a one-off upfront payment.

Another clever strategy to repay your mortgage more quickly is to pay weekly or fortnightly rather than monthly. The difference here is that rather than make 12 monthly mortgage payments a year, you end up paying the equivalent of roughly 13 which of course speeds up your repayments.

Frank Lopez, financial analyst at Cannex, says it is also worthwhile considering whether you need all the bells and whistles that come with a standard variable home loan or whether a basic variable loan will suffice.

The difference in percentage terms is around 0.7 percent which on a $300,000 loan works out at an extra $2000 approximately a year in interest.

The bells and whistles include features such as redraws, payment holidays, interest only, an offset account, adding fees to the principal loan and splitting the loan to part-fixed, part-variable. If you're not using them, then don't pay for the privilege.

The Commonwealth Bank suggests that you keep your other debts in check.

"There is no point focusing on putting all your money into the house while incurring credit card debt," a Commonwealth Bank factsheet says. "Ensure you don't overspend in other areas or over commit to repaying your home loan at the expense of being able to service other debts."

This is particularly important given that most other debts such as credit cards charge a much higher rate of interest than your home loan. As a result if your credit card has got out of hand, it may be worthwhile considering consolidating your debt by rolling it into your mortgage. While you will benefit from the lower interest rate, you should be mindful that what you are really doing is turning what should be short-term debt into long-term debt. Do you really want to be paying off that dress you bought today in 20 years time?

The ability to make additional repayments whenever you get a windfall is also a useful tool in reducing you home loan debt. Consider putting the recent stimulus package payment into your home loan or any work bonus or tax refund you might receive.

You may find some restrictions in using this strategy if you have a fixed loan, although in most cases you are allowed to make some extra repayments up to a certain amount.

Some banks meanwhile may offer lower rates if you take out a packaged product where you have a mortgage, a transaction account and a credit card all packaged together. While the fees are invariably higher for this product, you benefit from an interest rate saving. And the good news is there is no obligation for you to actually use the packaged credit card or transaction account.

Another way to save is to think twice about refinancing particularly in the first five years of your loan. Exit costs can cost you anything up to $4500, according to Cannex, which could make a switch in those early days an expensive exercise.

Paying off your home loan as quickly as possible is the dream of most borrowers. Through smart thinking there are many strategies that will help you achieve this end.

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