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Painless ways to pay down debt faster

For most people the one debt that looms largest, and longest, is a mortgage. It’s likely to be set up for 30 years, a long time in anyone’s book, and will probably be the single biggest sum debited from your account every month. Many people are unaware that with compounding interest over 30 years, you could be paying up to twice the original asking price of your home.

There are ways you can pay off that ‘grip of death’ faster, save yourself a lot of money, and get mortgage-free sooner.

Pay more every month

When you sign up for a mortgage, the bank calculates what your payments should be to meet minimum requirements. Most people just assume that sum is non-negotiable – well it is, but only downward. If you can find it in your budget to pay more every month, you could save thousands of dollars in compound interest.

For instance, a $300k mortgage at 4.5% for 30 years might require payments of $350 a week. Stick to that and you’ll pay approximately $250k in compound interest. If you can bump your payment up $50 a week, you’ll knock seven years off the term, and save $65K. If your budget allows you to go as high as $100 a week over the minimum, your mortgage will be gone in 20 years instead of 30, and you’ll save a whopping $100K.

Do a careful budget and find out what you can spare with a bit of belt-tightening. Don’t forget to reserve some money for emergencies, and then devote any extra to getting that mortgage down.

Lower interest? Keep payments the same

A lower interest rate means the minimum repayment can go down, but don’t let it. The only one that wins is the bank, so take advantage of an interest-rate drop by keeping your payments the same and paying down that capital. You’ll trim years off your term (depending on the interest drop) and save thousands in interest payments.

Get the right structure for your loan

It’s common for people to set their entire loan for a term, in a sort of set-and-forget mentality. But it restricts you from making extra payments when you can. If you come into some money – an inheritance, lotto win or simply a work performance bonus – you’re more likely to fritter it away if your set term means you can’t use it to pay down your mortgage capital.

Set your loan up with options – part of it can be a revolving credit facility, a bit like an overdraft only bigger. It might cost a small amount more in interest, but you can use it like a checking account, with your entire income going into it every pay day, to offset interest and pay down capital.

While your income reduces the capital and interest, pay for things with your credit card and clear it every month, thus avoiding the high interest. Any windfalls can go straight into the credit account, and if you’re careful and keep to your budget, you can take the capital of your loan down swiftly. Some people have reduced a 30-year term to just twelve years.

An example in numbers: a $500K mortgage at 5% interest for 30 years will make the bank about $465k in interest – almost as much as the original loan. Use discipline and revolving credit to retire your mortgage in 12 years, and you’ll save almost $300k of that interest, plus enjoy 18 years mortgage-free.

It can work if you want it to – one Global Finance customer has this to say:
“The Global Finance team worked on a plan to pay off our 30-year mortgage in 13 years. We followed their guidance, and after 9 years and 3 months, we are mortgage-free.” – Brian Rodrigues

Don’t set-and-forget your mortgage

Your home loan is too big and too important to let your bank make all the decisions. Before you sign that mortgage agreement, do a careful budget to determine what your top repayment amount could be. A bit of belt-tightening now could save you thousands, even hundreds of thousands, in interest payments.

Think carefully about the terms of your mortgage and how they will work for you. Are you locked in, or can you have some flexibility? Get some advice on how to make a revolving credit facility help you get mortgage-free faster – and save you a lot of money too.