Fund fees and charges yourself

Don’t borrow more to pay charges!

Try to cover any fees and charges from your pocket rather than letting the balance of your loan increase as charges are added.

As charges are added and your loan amount increase you are essentially borrowing the money to pay the fees which means that you will be charged interest on those fees. The lenders essentially double dip, by 1) charging you fees and 2) charging you interest on those fees.

To combat paying this additional interest try to fund the fees yourself, by making additional payments which match the fees/charges.

If you have an annual account keeping fee of $300 added to/taken away from your balance on the anniversary of your loan, try to pay an extra $300 off your loan during the same month. 

If you have a monthly fee on your home loan account set up a recurring payment cover the fees – if the lender adds a fee of $10 on the 1st of each month, set up a recurring overpayment of $10 per month to coincide with the charge. You could try making your payment $15 per month. That way you will cover the fees and be paying off an additional $5 per month off your loan. You’re not likely to miss the additional $5 per month!

But most importantly – cover any fees/charges by making extra corresponding repayments as the fees/charges are applied to your home loan.

Do this as well as making any other overpayment.  Do not be tempted to think - "It's OK, I'm paying an extra $50 per month anyway so that covers the fees" - make an effort to pay the fees as well.

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Stop saving and start saving

Most of us have a savings account where we put money away. $20, $50, $100, $200 per month – the amount vary, but most of us try to save for the annual holiday or for Christmas or just for a rainy day. Well – if you put money away for a rainy day - it’s time to realise that it’s pouring with rain right now!

If you are saving for a specific thing such as a holiday, a new car, a new outfit – great! Keep doing so, but if you are just saving for the sake of it (because your mum told you it was good to save) try switching the regular saving into a regular additional home loan repayment.

Think about it. What are you really saving for? Your future? Financial Independence? And what better way to invest in your future that to be debt free quicker?

That extra $100 per month that normally goes into the saving account could save you over $70,000 in interest payments and could mean you are debt free 4 years sooner. Now wouldn’t that be nice?

It’s not the best option for all. Some of us like to know that there is a lump sum in the bank to fall back on in case of emergencies, but it’s certainly worth thinking about!!

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Off-set account – not right for all cases

An offset account is like a reverse savings account.  Instead of earning interest on the balance, you save the corresponding interest on your home loan.  So if you have $5,000 in your offset account, you are not going to pay interest on $5,000 which is sitting in your home loan. 

There are different type of offset account - some offer you 100% offset, but there are others that give you a lower percentage offset - so make sure you read the fine print.

Using your offset account correctly can save you hundreds, even thousands of dollars over the term of your home loan, but make sure that you do your sums first.  Don't just get an offset account because you think it's the right thing to do.  Most offset account carry a fee and you need to be sure that the saving outweighs the cost of having an offset account.


Simple examples:

• If your 100% offset account cost is $10 per month, so you need to save more than $120 in interest each year for it to be worth your while. To save $120 per year in interest you would need to maintain a balance of no less than $1,600 - not actually that hard if you use it as your only bank account.
• If your 100% offset account costs you $300 per year you'd need to maintain a balance of over $4000 for it to be worth doing.
• If you have a 50% offset account that costs you $200 per year you will to maintain a balance of over $5,550 for it to be worth doing.

So do your calculations and read the fine print before you sign up for an offset account and make sure that the offset will, in fact, save you money and not cost you money. 

If you do the calculations and work out that an offset account would work for you use your offset account to the max - make it work for you.  Use it as your only bank account and keep as much money in the account for as long as possible.  The best way to get the most from your offset account is to stop using all other transaction and savings accounts.

If you are saving for a something specific, it may be worth keeping a separate account so that your savings are not 'lost', but if you can manage your money in a single account - do so now and you could save.

Make sure all your income goes into your offset account. If you are a couple with separate transaction account, think about combining your efforts and use the offset account as a join transaction account with ALL income going into the offset account.  Have all salary, dividends, bonuses - everything paid directly into your offset account.

Keep the balance as high as possible for as long as possible. Pay bills on time – not early! 1 day before the due date is generally OK for BPay and EFT transfers, but it depends on your bank so make sure that you do not pay too late, but definitely do not pay your bills a week or 2 early.

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.


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Don't blow your windfall - not all of it anyway!

If you come into some money – a decent lump sum – maybe a lotto win or a tax refund or a win on the Melbourne Cup…. Don’t just spend it all at once.  Use some of it to pay off a lump sum off your home loan - it can make a big difference!

What about that Medicare cheque or Health Fund refund? If you paid for the treatment months ago and you haven’t missed the money put it straight into your home loan.

Here are a couple very rough examples:

• A lump sum of $1000 during the second year of your home loan you will actually save you around $8000 in interest over the term of the loan and could reduce the term by 3-4 months.
• A lump sum of $500 during the fifth year of your home loan could save you up to $6000 in interest and reduce the term by 1-2 months
• A lump sum payment of just $100 made in the first year could save you over $800 in interest over the term of the loan

So no matter how small or how large the payment, it’s worth throwing all you can afford at your home loan. The emphasis is on “all you can afford”. Do not be temped to throw too much at your home loan. Do not leave yourself short – that has its own challenges and pitfalls, so do not over commit with lump sums.


This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.



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Maintain your repayments if interest rates drop

If interest rates fall, maintain your repayments at the same level. You are already used to not having the extra dollars so stick to the same repayment amount.
For example:

• $300,000 loan at 7.50% (principal and interest) over 30 years
  Monthly repayment - approx $2,098
• $300,000 loan at 7.25% (principal and interest) over 30 years
  Monthly repayment - approx $2,047

By continuing to pay $2,098 per month you would be overpaying by $51 per which could save you $40,000 in interest over the term of the loan and reduce your term by over 2 years!

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Kindergarten economics
In theory, if everyone did this instead of spending the $51, it would keep the pressure on retailers and would, in turn, maintain pressure on RBA to cut interest rates again...... in theory!!! 

It would be a theory worth testing (if we could get the whole country on board) - would need someone like Mark Bouris or David Koch to push this experiment.  How about it Mr Bouris, Kochie - either of you willing to give this a go to help "Middle Australia" get out of debt quicker?

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This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.
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Round down your balance

At the end of each month round your home loan account down.

Once the interest charges have been added, pay an additional payment to round down your balance to the nearest $10 or if you are feeling a bit flush to the nearest $50. It won’t save you a lot – probably less then $0.10 per month, but it all adds up over the term of the loan.

Either way you save and it costs you next to nothing!

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Use your dividends wisely!

Don’t spend your dividends.

If you have any shares, rather than spending the dividends when they come in, why not set up a direct deposit for all your dividend payments to go directly into your home loan account. By having them deposited straight into your home loan account you will not be tempted to spend the money.

A $50 dividend payment could save you over $100 in interest over the term of your loan. Do that every year with all your dividend payments and who know how much you could save and because the money is never going into your regular transaction account you should never miss it!

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.

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Save on your home loan - be clever about paying bills

A bit of effort could give you FREE money!

 

If you have a fully flexible home loan account which allows overpayments and redraw with no fees use it to your advantage.

When a bill comes in pay the amount into your home loan account as soon as the bill arrives. Then set up a payment for the bill from your loan account the day before the bill’s due date. It does not sound worth while, but have a think about how many bills you pay each year. Let’s take a couple of examples:

• Monthly credit card bill for $1000 arrives on 15th of the month and it is not due for payment until the 2nd of the following month. By putting the $1000 into your loan account and paying the bill 2 weeks later from the loan account you just saved almost $3 in interest. Do this every month and you will save $36 in interest.
• Quarterly Electricity bill for $400 – put the $400 into your home loan for 2 weeks and over the year you could save $4 in interest.

Do this with ALL your bills and who know how much you could save. $100 per year – maybe more? All depends on how big those bills are. It does not sound like much, but essentially it’s free money. Would you say ‘no’ if someone offered to $100 – no strings attached? 

Try it for a year and see for yourself.

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.

 

Set up an extra recurring payment

Most home loans allow you to make additional payment. Set up a recurring payment that you will never miss - don’t aim too high.

The key to the success of this is to make sure it is an amount that you will never miss. If you are likely to miss it – you are likely to stop the repayment in the future. Start low and if you can increase the amount over time all the better, but even $10 per week will make a huge difference over time! So how much could an extra $10 per week save you??

Well, you may be surprised to hear that an additional $10 per week could save you around $35,000 in interest over the term of the loan and reduce your term by nearly 2 years.

$10 does not buy you much these days, but would you have thought that $10 per week could make such an impact on your home loan and long-term financial independence?

If there are 2 of you and you both put in an extra $10 per week your savings could double!!

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.

Move to fortnightly payments

Change your repayment from monthly to fortngihtly.  Rather than 12 monthly payments you will actually make 26 fortnightly payments in a year. 

You will save on interest and you will end up paying off more capital in any given year.

For a $300,000 loan over 30 years this could save you almost $120,000 in interest payments over the term of the loan and you could reduce the term of your loan by around 7 years!

This example is based an initial loan of $300,000 over 30 years at a rate of 7.5%.  The savings are not exact and are designed to be nothing more than thought provoking.  The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products. 

Money - home loan back to basics

With all the talk of Interest Rates changes I though it might be worth looking at home loans and how to get rid of your home loan ASAP.

Not a subject directly connected to BeFound and employment, but a subject that is very important to us all.

Firstly, unless you are very strict with your money and have a good handle on exactly what you are spending try to avoid an ‘All in one’ portfolio type loan which work like a normal bank account in permanent overdraft.

These loans are extremely flexible, but the lenders are banking on you getting lost with your budget and essentially treating it as an interest only arrangement – always reverting back to your max overdraft limit.

As with anything you can use the flexibility to your advantage, but be very careful. If you are not great at budgeting do not use the loan account as your everyday bank account – maintain a separate every day transaction account.

The thing to realize is that despite what they say the banks actually want you to be in debt for as long as possible – that is how they make their money so when you are offered fancy new home loan product, make sure you know exactly what you are signing up to.

The biggest mistake is using home loans to free up cash. Using home loans as a cash flow tool is extremely risky and your only aim with your home loan should be to pay it off ASAP. Reduce the term as much as you can and overpay as much as you can afford as often as you can afford.

There are people out there who still promote interest only loans – but my view – steer well clear of them unless it’s for an investment property and you know exactly what you are doing.

Over the next 6 days we will give you 6 easy ways to pay off your home loan quicker. Do all of these and you could save well over $150,000 in interest and shave at least 10 years off the term of your loan.

All the examples we show over the coming days are based an initial loan of $300,000 over 30 years at a rate of 7.5%. The savings are not exact and are designed to be nothing more than thought provoking. The scenarios are generic and do not take individual circumstances into account. You should seek independent financial advice before making any significant changes to your financial products.