Wednesday, 19 December 2012

Mortgage repayment tips - part 3

This is the third of a five part series on mortgage repayment tips.  Today’s topic is “Minimise the contracted loan term.”

I explained the importance of having the shortest loan term possible in an earlier post:

The best tips I can think of to achieve this include:
  • Obtain the shortest term possible upfront – Some sources recommend taking a 30 year term to minimise your required repayment and then paying extra.  However, I think this just opens up the opportunity for you to fritter away the money before it ever makes its way into the mortgage.
  • When you refinance, always keep your loan term at least as short as the previous term you signed up to minus the number of years you’ve had the loan – e.g., if you signed up to a 30 year term five years ago, ensure your refinanced term is for a maximum of 25 years.  If you don’t do this and you refinance a few times, you’ll be paying off your mortgage well into retirement!
  • Keep all your savings and day-to-day funds in an offset account – A balance of just a few thousand dollars can reduce your loan term by months.
  • If you don’t have an offset account, make your repayments weekly or fortnightly – As interest is calculated daily on your loan account, making your repayments early will reduce the interest accumulated.  However, having an offset account has the same impact.
Most banks and interest rate reference sites have a few calculators that you can use to determine the possible time savings on your loan by following these tips.