Home Loan Today

Home Loan Today - Gone Tomorrow

By Maya Pavlovski

You have finally purchased a home of your own. For so many years it seemed to be like a dream always just a little out of reach. What happens next? You do not need to be shackled to your home loan for 25 or 30 years. Here are some useful tips to help you pay off your mortgage sooner and achieve "true home ownership".

Avoid Honeymoon Offers Many lenders use introductory or honeymoon rates as marketing tools to attract new borrowers. You are initially offered a cheap rate on your loan to get you in the door but once the honeymoon period is over, the lender will switch you to a higher variable rate of interest.

To understand the true interest rate you end up paying with a honeymoon product - look at the advertised comparison rate on such a loan. Invariably you pay less today but more in the long run.

Pay more to get ahead It is a very simple concept to grasp - the more you pay off your mortgage every month the faster you will pay off your loan. Most people think in terms of making sure they pay just enough to cover their set repayments. By doing this you will keep your mortgage for the full loan term of 25 or 30 years. The key to paying your loan off faster is to make as many 'extra' repayments as you possibly can.

Increase the frequency of your repayments One of the simplest and best strategies for reducing the term and cost of your loan (and thus your exposure should interest rates rise) is to make your repayment on a fortnightly rather than monthly basis. By splitting your monthly repayment into fortnightly you will effectively be repaying the same annual amount but your outstanding loan balance will reduce faster.

Amazingly enough, this change can cut thousands of dollars and years off your mortgage.

The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. And this can make a big difference.

Have you considered a professional package?

Most lenders offer a range of professional packages to clients who are prepared to pay a small monthly fee. These packages offer a reduction to the standard variable interest rate, can come with a cheaper home insurance, fee-free credit cards and a number of other options.

Consolidate and save If on top of your home loan you also have other outstanding loans such as a personal loan, credit cards, car loans etc. - by consolidating all your other outstanding loans into your mortgage you can generally significantly reduce your overall loan obligations and hence have more funds available to apply to your mortgage.

Many lenders will allow you to re-finance - your other debt under the umbrella of your home loan. This means that instead of paying 15 to 20 per cent on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at a home loan rate.

Utilize your available equity Home equity is the difference between the current value of your property and the amount you owe the lender. For example, if you have a property worth $500,000 on which you owe $200,000, you are said to have home equity of $300,000. In most cases you should be able to establish a line of credit or a home equity loan to access these funds.

Generally lenders will allow you to borrow up to about 80 per cent of the loan-to-value ratio (LVR) of your available equity. You can use this equity to help to pay off your home loan sooner.

You can use your home loan equity as a deposit towards property investment. Over time both properties will grow in value. Eventually you will be able to sell one and pay off the mortgage over the other.

Spend less on lifestyle We are not suggesting that you eat less or buy nothing other than absolute necessities. However if you have a goal to pay off your mortgage as soon as possible you do need to watch lifestyle expenditure.

Spending less on cars, holidays, and going out can help you save more towards your mortgage. If you focus on doing this for at least the first 2-3 years of your loan - there will be a marked difference in your financial position for years to come.

Make sure your loan is portable

Although you may believe today that you will live in your home for many years to come - things change.

It is prudent when looking for a new home loan to obtain one that is portable. A portable home loan can be transferred to a different property saving you extra loan set up fees.

Stay away from bridging finance Bridging finance is a temporary loan available from most lenders which allows you to settle on the purchase of one home while waiting to sell another.

It often happens that you see a house you like more than your own. You know you can afford it. It is a bargain. All you have to do is sell your home first. So you sign a purchase contract and then put your property on the market. That is when things start going wrong....interest rate goes up...market is slow.....you know your house is worth more than the best offer you have received to date. You decide to wait but also need funds to settle on the new purchase. All the savings you have made on the purchase of your new home will go down thew drain in a matter of days as a result of a bridging loan. Theses loans are very expensive and best to be avoided.

Our advise is simple - If you need to sell, do not buy before you sell.

Is the loan right for you?

Choosing a loan is about knowing what you want. You only want to pay for the loan features that you need. If you only need a bicycle, don't buy a motor car.

Different loans have different purposes so you must match a potential mortgage to your needs. Taking out an interest only loan is great for investors but if you are looking to live in the home and pay it off quickly, principle and interest is best.

Dropping the features you don't need can save you up to 1 per cent on the interest rate of your loan.

Over 25 years that's a lot of money.

Consider non bank lenders As recently as 10 - 15 years ago most people had their mortgage with one of the major banks.

Since the advent of the mortgage managers, there's been a lot of talk about smaller and "non-traditional lenders" offering very competitive home loans at low rates.

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