Sunday, June 1, 2008

Tame your mortgage monster

by Jaeneen Cunningham

Getting debt under control is not as difficult or as daunting as it seems. Coming up with strategies to tame your mortgage monster is easy - it is implementing them and sticking to them that requires will power.

Home loan customers have probably known for some time that the best way to save money on a mortgage is to pay it off as fast as you can. The longer you take paying back the principal loan amount the more interest you pay along the way, the higher the overall cost of the loan. You can do this in a number of ways: you can pay slightly higher repayments on a regular basis. You can make your payments more regularly than required – say weekly instead of monthly. This means two things: there will be a slightly lower interest charge as your loan balance reduces each week, and more significantly, you will be making one full extra repayment each year.

You can get even more savings if you 'park' your spare cash in your mortgage. A popular product to help achieve this has been the Line of Credit. A loan like this lets you put all you money directly into the loan account and then lets you access your money as you need it through a debit or credit card. In theory the result is a lower regular loan balance and therefore less interest charges. No set repayment amount is required as long as you pay the interest each month. On some loans the interest can even be 'capitalised' up the limit of the original loan that was first approved.

However, we have found many customers using a line of credit have tended to pay the interest charges only. It has only been with the passage of time that they have come to realise that the loan isn't coming down the way they planned. The idea that you would pay more into the loan than you were taking out seemed like a good idea at the inception of the loan. However, as time passes so do priorities and maybe those goals that were set three or four years ago have had to make way for other important life changes like career moves or family.

In general there are really only two simple ways to clear debt quickly and save money: use a product with the lowest possible interest rate that fits with your current circumstances, and pay the bank more than you are required to under the terms of your loan. With the booming property market many customers have not been concerned about the persistent level of their line of credit debt and if it suits your lifestyle, why not spend a little of the capital gain that you are making now rather than later when you sell the property. On the other hand, If you have found yourself struggling with a line of credit limit that just wont come down and you are concerned, then maybe its time to restructure your debt into a loan that is a bit more restrictive on your spending habits.

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