Reduce Your Home Loan Debt

Get on top of your debt now and go into the next financial year with less stress.

Company spokesperson Kristy Sheppard said, "Given our fascination with property, Australians typically have high personal debt. However, as opposed to where we were trending before the GFC, today's household savings have reached 10.7% of disposable income - the most in 24 years."

"The problem for many mortgage holders is knowing how to best put these savings to good use. For example, did you know if you put a lump sum of $2,000 into a 7% 30-year $300,000 home loan at five years in you save almost $10,000 in interest and five months off your term?

"The start of a new financial year is a perfect time to reassess your mortgage repayment strategy and the suitability of your loan against new loans available today. Avoid personal debts resulting in your own financial crisis by revisiting your budget and implementing debt reduction strategies.

"There are many advantages to repaying your mortgage quickly. Not only will you own your home sooner, you can avoid hefty interest payments and may be able to access built up equity to use as a security to upgrade your home or purchase an investment property."

Tips to help reduce your mortgage debt:

1. Repay your mortgage more often. For example, making fortnightly repayments equal to half your minimum monthly repayment means you pay one extra monthly repayment each year.

2. Contribute lump sums when possible. This reduces interest owed and the loan term. If you put your tax return, say, $1,000 into a $300,000 loan (at 7% over 30 years) at year one in, it reduces the term by one month and the interest owed by just over $2,360. Think about doing so annually.

3. Build a financial buffer. Home loans with offset accounts enable you to link a savings account to your loan and 'offset' (use) that amount to reduce the interest owed. If you kept $5,000 in an offset account, then on the above mentioned loan the term would be reduced by almost two years and you would save over $33,000. Note there could be an ongoing account keeping fee.

Tips to avoid accumulating any debt:

1. Resist temptation. Always set a budget and take a shopping list, whether you are shopping for groceries, furniture, travel, property, etc. Avoiding overpriced or impromptu purchases will keep your budget in line and help with credit card debt as often unplanned purchases end up there.

2. Don't be late on repayments. Dodge accruing interest by scheduling automatic home loan and other debt repayments. Funds transfer on the date selected by you (ie. your pay day or the day after). The only thing left to action is increasing your repayment if the interest rate increases.

3. Create emergency savings. Repay your loan as though its rate is at least 2% higher, putting this straight into your loan or its offset account. This buffer will help with emergencies, rate rises or unexpected bills, so these costs won't end up on your credit card or gather late payment costs. If your loan doesn't allow extra repayments, put the extra funds into a high interest savings account.

For home loan tips, trends, facts, data and other information, visit,
*RBA Financial Stability Review, March 2011 -

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