I wrote last week of the idea of refinancing your mortgage as a personal finance strategy. This week, let’s look at the opposite strategy-the one adored by Suze Orman, Dave Ramsey and thousands of mortgage holders around Australia. The get-rid-of-it-quick strategy.
Of course, paying off your mortgage at super speed is a risky strategy if you don’t have a couple of other things organised first. An emergency fund is essential, otherwise you’ll end up having to refinance should an emergency happen, setting yourself back financially and costing yourself a bunch in admin fees. I can also see little point in doing everything to pay off a relatively low interest mortgage should you still have outstanding high interest consumer debt. My personal preference would always be to kick the consumer debt, while maintaining a steady rate of mortgage repayment.
If you’re keen to own every part of the roof over your head, and as soon as possible, what are some strategies to do so at a fast pace? Here are some thoughts, inspired by an article on Choice.
Pay Above The Line
There’s no real mystery to it. As long as the rest of your finances are healthy, paying extra off your mortgage is a great idea. It doesn’t have to be a huge amount, you can make significant advances simply by paying off an extra couple of hundred dollars a month. The amount you’ll save in interest over the course of a mortgage will make the extra squeeze very much worth it. Check out your budget to see what you can spare, while meeting all your other financial goals and keeping a sustainable balance in your finances. If there’s no space, look at creating some. Whatever the difference (even if it’s just one meal out less per week), add it to your mortgage.
Use Your Payrise
If you’ve gotten a payrise, you might find it an easy way to increase your contributions to your mortgage. It is extra money, calculated on a weekly rate, that you’ve managed to live without until now. You’re unlikely to miss it, and it’s a great opportunity to save on interest over the years.
Sometimes, it pays to play tricks on ourselves. If you pay fortnightly, you’ll sneak an extra month’s worth of payments in per year. It also is far easier to allocate for fortnightly payments than monthly, so you could find yourself more comfortable in your budgeting. There can be a fee with fortnightly repayments, so you’ll need to crunch the numbers in order to be sure you’ll save enough with interest to make the extra payments an effective saving measure.
If you’re not considering fixing part of your mortgage in a premium mortgage, or have no interest in using it as a line of equity, then don’t pay for the privilege. Switch to a basic mortgage, and save on your interest rate, unless you’re considering using some of the options in the future.
As An Investment
Regarding your mortgage as a good place to park a lump sum investment depends whether or not your lender charges for extra payments. If they don’t (and if you already have an emergency fund and credit card repayments sorted), then it can be a great idea to use a lump sum towards your mortgage. It’s a low risk investment that won’t be taxed, and with the interest saved, you’ll be making quite the return on your money.