Every person with a mortgage will be rejoicing in the 2008 Melbourne Cup day windfall handed to them by the Reserve Bank of Australia.

Apart from relying on the Reserve Bank to help with mortgage repayments, do you realise there are many other ways to pay off your mortgage sooner?

In the latest book from 21st Century Education, What I didn’t learn from my finance broker but wish I had, author Jamie McIntyre provides a range of options that can save mortgagees thousands of dollars and cut years off the term of their home loan.

Here is a sample of some the tips direct from Jamie McIntyre for saving money and shortening the term of your mortgage.

Every little bit helps
Just putting aside a small amount of extra money every week could potentially cut a couple of years off your mortgage. And remember if you have built up significant equity and you want to borrow again (to finance renovations, for example) you can top up your mortgage and avoid repaying loan establishment fees or mortgage stamp duty.

Pre-pay Your Mortgage
Probably the single best investment that most people can make is an investment with a guaranteed high return. It is nothing fancy - it is simply paying off your home mortgage as quickly as possible.

Mortgage pre-payment is especially important in the initial years when most of the mortgage goes towards interest. Take a hypothetical $200,000 mortgage on a fixed 5% interest rate amortised over 25 years. The monthly mortgage payment works out to $1,163.21 and after the first year the principal balance is still $195,845.49.

After five years, the balance is still $177,015.00 or 88% of the original mortgage is still outstanding. In those five years, a total of $46,807.61 in after-tax dollars has been spent to carry the mortgage.

Now imagine that an extra $200 can be paid towards the mortgage principal. After the first year the principal owing is $193,390.30 and after five years it has shrunk to $163,431.59. The loan period will be 6 years shorter and interest savings of $41,255.47 can be realised.

The beauty of prepaying the mortgage is that an extra payment reduces the mortgage balance and a little bit of every future mortgage payment that would otherwise have serviced the loan will now go towards reducing the loan. And over time every little bit adds up to a lot of money.

The advantages of a bi-weekly mortgage payment
Do you know that every year you are giving away the hard-earned equity in your home by paying more than you have to in interest? Most homeowners don’t realise they can cut up to seven years off of the length of their mortgage and save thousands of dollars in the process.

For instance, if you have a small $80,000 mortgage and are paying an interest rate of 7 percent. How much will a bi-weekly payment method save you, versus paying the conventional mortgage off over 30 years?

You would be saving over $25,000. The more your loan amount or the higher your interest, the more money this you can save. When you pay your mortgage bi-weekly, there are a number of factors that come into play.

You are reducing the term of your loan by up to eight years, you are paying less interest over the life of your loan and you are building up equity in your home sooner because more of your money is going towards principal than interest. The savings don’t end there.

Due to the fact that your mortgage will be paid off years in advance, you will be able to discontinue your private mortgage insurance earlier than you would if you were paying over a full 30 years, thereby saving you even more money.

The bi-weekly mortgage method is also a wonderful option for people who want to pay off their homes in a shorter period of time than the conventional thirty-year mortgages allow, but who don’t qualify for a standard 15-year mortgage. It offers homeowners more convenience and flexibility than a fifteen-year mortgage.

With a fifteen-year mortgage, if you want to change to a thirty-year mortgage, you would have to refinance. With the bi-weekly payment plan, if your circumstances temporarily change and you need to pay on a monthly basis for a period of time, there is no refinancing necessary. Unless you’re independently wealthy and don’t care where your money goes, then you will definitely want to look into paying off your mortgage on the bi-weekly plan, and learning how to do it on your own.

Offset accounts
Over time savings in an offset account can help reduce the loan principle allowing you to pay off your loan sooner or to build up equity. There are two different types of offset accounts: a 100 percent offset and a partial offset account.

With an offset account your salary is placed in an account attached to your mortgage. Interest is calculated on the amount you owe minus the amount in your account. This means your salary works to pay off your loan. All-in-one accounts include a credit card, which you use for your expenses and pay off in one hit at the end of the month. This maximises the amount of time your salary is being deducted from your principle.

For the full story on paying off your mortgage sooner you can obtain author Jamie McIntyre’s latest book, What I didn’t learn from my finance broker but wish I had, from 21st Century Education or your favourite bookstore.

21st Century Education also have a range of books available, including:
Think and Grow Rich
What I didn’t learn at school but wish I had
What I didn’t learn from my real estate agent but wish I had
What I didn’t learn from my financial planner but wish I had
What I didn’t learn from Google but wish I had

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This entry was posted on Wednesday, December 17th, 2008 at 3:03 pm and is filed under Property, Wealth Creation. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.