16 Ways To Pay Off Your Home Loan Faster
Given financial times are getting harder as interest rates rise and so does the cost of living, paying down your debt and reducing your interest costs is now more important than ever.
Developing good financial habits, improving them over time and sticking to them is so important. It is the compounding effect of your good habits that will save you tens if not hundreds of thousands over the life of your loan. This is not an exhaustive list but one that should get you well on the way to shaving years off your home loan.
I have separated the below tips into two categories; the first you can do on your own and the second category where it may pay to get the advice of an expert who can talk you through the options relative to your situation.
On your own:
Have a budget and stick to it as best you can. Fail to plan and plan to fail. Utilise the many free resources out there - budgeting services, sorted.co.nz or any of the major banks have budget templates you can use.
Review your budget regularly and look at where you are overspending. Once you’ve made a budget, don’t just forget about it. Review it, look at what is working and what’s not and adjust your approach.
Review your purchases regularly so that you can become more intentional with your future purchases. Evaluate if you would still pay the same amount of money again today to buy the item again if you hadn’t already bought it. How many times have you bought clothes you have never worn, gadgets you rarely use, toys your children don’t play with, something that was on sale because you thought it was good value but don’t really want it. Reviewing these purchases helps us to be more mindful in the future of the impact of our consumerism on the planet and our wallets.
Have a chat with your partner / spouse and make sure you’re on the same financial page. Have a discussion about where you’d like to be in five years time, in ten years time. Set some goals. Often one of you will be more on board with saving and one more on board with spending. Talk about your differences, talk about how you plan to achieve your goals together. What roadblocks are likely to come up? How do you plan to tackle those roadblocks together?
Meal plan. Write a list when you go grocery shopping and stick to it. Shop once a week.
Review the food waste you are throwing out each week. The leftovers that go uneaten, the food that spoils before you even get to it. Are you eating out more than you expected so you find you bought too much food for the week? Does this happen often? Are you buying more than you need because something is on special?
When you get a pay rise, a bonus or an unexpected windfall use it to pay down your debt. Often our inclination is to ‘reward’ ourselves with something frivolous that we wouldn’t normally spend money on because it’s a bonus and not our ordinary pay. Work out how much this will save you in interest and use this instead to pay down debt.
Get better control of your money by using different bank accounts or “the envelope method” to help control your spending. Once you have decided how much you want to spend in each category (step 1) use separate accounts to ringfence the amount you spend in each category. For example keep discretionary spend (entertainment, eating out, lifestyle) in a separate account and only put the amount you have allocated in your budget for those expenses into that account.
Consider your living situation. This isn’t for everyone but if you are prepared to open your home to international students and / or boarder or flatmates and put this “extra” money directly on to your loan each week this one thing alone can shave years off your mortgage.
You may want to review these with a trusted financial adviser:
Pay down debt with the highest fees and interest first. Or look to combine debts to make payments more manageable and at a cheaper interest rate.
Review your insurances. Make sure you have appropriate risk cover and that you’re not overpaying for it. You can shop around yourself or you can engage a financial adviser to do the work for you.
Understand the difference between good debt and debt. Good debt is productive and often makes money for you. There is innate risk in any debt that you take on however in a good debt scenario there is an expected financial benefit in having the debt like with a rental property that provides an income stream to cover the debt payments and also has the potential to rise in value over the long term. Debt that you use to finance your lifestyle, go on holiday, buy an asset that depreciates in value over time is generally not considered good debt.
Review your credit cards and how you use them. Make sure that you are making money off your credit card provider. Work this out by “dollar value of rewards provided to you in the last calendar year less all fees and interest charged over the last calendar year (including the annual card charge)”. If you are making money off the card provider, great keep it. If not cancel it now. Virtually the only way you can make money off your credit card provider is if you get a card with good rewards and make sure you pay it off in full by the due date EVERY-SINGLE-TIME no exceptions. If you can’t do this then it it not a good idea to have a credit card and all you are doing is robbing money from your future self each time you spend on your card.
Structure your mortgage effectively. Make sure you have the best loan structure in place, suited to your situation. It is best to talk to an adviser about this one as there are far too many elements at play to give any generic advice but this alone can save tens of thousands or more in some instances.
Line your mortgage payments up with your pay. If you are paid weekly and your loan is paid monthly, your weekly pay will be accruing in your account until the monthly loan payment comes up. Better to pay it down off the mortgage as and when it comes in and reduce your interest costs. Talk to your Bank to see if you’re able to do this with your particular loan.
Work out your “opportunity cost”. What I mean by this is that you have the opportunity to pay your loan down faster. If you’ve done steps 1-13 I’m sure you could make some savings so that you could pay that extra amount towards your loan. What is the difference in what you are paying on your loan now and what you could afford to be paying, then work out the difference you would save in interest if you make those bigger mortgage payments over the life of your loan. This is where a financial adviser can come in handy. There are plenty of calculators where you can do this online for yourself but if you’re not confident tondo it yourself, engaging a financial adviser is a good idea. Their services are usually free and they will let you know before engaging them if they do charge a fee.
So why is that when you probably have considered at least some, if not most of the above already that we aren’t doing it? You probably are unaware of the massive impact of compounding interest and the difference that making these changes could make. Because paying off your loan faster also means that there will be a trade off. Do you want to put your bonus payment on your loan, or do you want to take that overseas holiday?
Sit down with a financial adviser today and make sure you are making decisions that are in your best long term interest.