Anneli Knight (taken from SMH 7/9/12)
Greg and Melinda Kerr have followed a simple savings philosophy that has shaved years of their mortgage and saved them tens of thousands of dollars in interest.
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“I always hated owing money to the bank,” says Greg Kerr. “And I never forget the saying, I think my dad told me, that a little bit will always add up to a lot. I just look at things and look to try and pay as much off my home loan as I can.”
One of his tactics is to always save any gold or silver coins he receives in loose change. “I have a container in my car that holds a couple of hundred dollars in coins and every time that's full I put it into a big money box, then every year I'd take that to the bank and cash the coins in and it would come to about $4000 and I'd put that straight into the house,” he says.
The other annual top-up to the mortgage comes from his tax return, though his most successful strategy has been to make weekly, rather than monthly, repayments on his mortgage.
“So instead of paying, say, $2000 every month, I split that $2000 into four, so $500 a week, and then if everything was going OK with us financially, I'd increase those payments - I would pay $650 a week, it would come automatically, every single week.”
Kerr stays motivated by watching the forecast term on his home loan, which he's reduced from 30 years to 19 years since buying his home four years ago, and he hopes to have the house paid off in full in the next five years.
The sooner the better
Senior financial adviser Sarah Riegelhuth, of financial advisory firm Wealth Enhancers, says one of the best financial strategies is to pay down your home loan quickly, and the sooner you can start doing that the better.
“The point in which you pay the most interest is in the first years of your loan because the principal is at its highest point. The sooner you can get onto reducing that principal the better off you'll be because your interest will start reducing right away,” Riegelhuth says.
One of the key reasons why it's best to pay off your home loan before other investment debts is because the interest on your home is not tax deductible, Riegelhuth says.
“It's just costing you money; you don't get anything in return,” she says. “Usually paying your home loan would be the first step to focus on. Unless of course you've got any other debt that's not tax deductible that's at a higher rate of interest, like credit card debt or a personal loan, then you'd pay that off first, and then your home loan.”
Check the difference
Financial journalist and author of Smarter Property Investment, Peter Cerexhe, says home owners should play with some numbers on online mortgage calculators to see how much of a difference small repayments or more regular payments can make to reducing the life of their loan.
“What you'll find is that if you can afford to pay a little extra, you can achieve a substantial reduction in the term of the mortgage,” Cerexhe says.
“If you can afford an extra $100 a month, put that figure in and see what it does to the term of the mortgage, then put in $150 a month and have a look to see what that does. Each of these will take a year or more off your mortgage. At a certain point however the benefits slow down. It's not like if $200 is great then $400 will cut off twice as many years - that doesn't happen. By trial and error you'll find an amount that is really effective for you for reducing the term of the mortgage.”
For example, a $300,000, 30-year loan at 7 per cent, will have minimum monthly repayments of $1995.91. By paying an extra $100 a month, you will save four years and 2 months off your loan. If you pay $200 extra a month you'll save seven years and one month, or 11 years if you paid an additional $400 a month.
Find what works for you
Greg Kerr's approach of increasing the interval of payments is another good strategy.
“Increasing your payments to fortnightly or weekly intervals is the equivalent of making 13 monthly repayments a year, and this approach on its own can make a significant difference," says Cerexhe. "That's a way of setting it up so you don't have to think about it, it just happens. It works well if your pay cycle is weekly or fortnightly.”
It's a case of choosing a strategy that works for you and keeps you motivated, Cerexhe says.
“I know some people that every time their mortgage balance ends in 200 or less they'll pay off that $200. It's a trigger to them, and they pay that off because $200 is an affordable amount so it slips in unnoticed,” Cerexhe says.
“It's a matter of trying to find what suits your personality and the way your mortgage comes in.”
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