As mortgage brokers we see a lot of “so called” debt reduction systems that are sold for thousands of dollars, yet we offer this advice as part of what we do every day with everyday mums and dads that just want to pay off their home loan.
So we thought we would explain a little about what these debt reduction systems are and why they can work but usually don’t.
We All Want To Pay Off Our Mortgage
None of us like to see our bank statements and the large chuck of our hard earned money going straight to the bank to pay our mortgage, but we still want to live in a nice house that we can call our own.
When we first took out our mortgage we were happy enough to have a 30-year mortgage and we knew that we could afford the repayments, but 30-years is a long time and we really want to pay off our mortgage sooner.
But how can we pay off our mortgage sooner?
Well no matter what anyone tells you, the only way to pay off any loan more quickly is to pay more of the principal off which means you need to either increase your payments or reduce the loan costs – or both!
Don’t be fooled by what you may be told by these “so called” experts that say they have a debt reduction system that will help you pay the mortgage off more quickly. All they are doing is creating a report to show you how you may be able to spend less and therefore effectively are paying more on your mortgage.
What’s The Secret To These Debt Reduction Systems?
When you get approached by a “so called” debt reduction specialist you might be led to believe that there is some secret way to pay your mortgage off sooner. They may promise that you can cut years off the term of your mortgage without paying any more, and for this advice they will charge a “modest fee” of $3,000 to prepare a report and show you the “secret” system.
Whichever way you look at it, to pay any debt off faster requires bigger repayments or reduced costs.
Sure, sometimes these “so called” specialist use revolving credit accounts to disguise what you are doing, but the fact is you will need to pay bigger repayments – but not much bigger.
Let’s Look At A Real Life Example:
We recently went through the process with family friends who were 1-year into a 30-year mortgage of approx $560,000 which was costing $1,545 a fortnight. They therefore had another 29-years on their home loan to go before they could really say they own their home.
They also had two other debts; a loan of $14,688 with Avanti Finance which is costing them $593 per month at an interest rate of 19.95% and a personal loan with GE Money at 29.95% which they are paying $100 per week on.
When we looked at this situation we suggested that we should consolidate the short-term debt into the mortgage to reduce the interest costs. We could have consolidated these loans and had them paid off over the same 29-year term and the fortnightly cost reduces from the $475 they are paying now to $65 per fortnight; however we wanted to show them what the effect on their mortgage would be if they kept paying the same $475 on their mortgage.
Consolidating Short-Term Debt
As illustrated here, by consolidating the short term debt and keeping the repayments the same they are able to pay the mortgage off in 18-years instead of the 29-years they have remaining. The interest that they will save by doing this is a staggering $269,917!
So by paying the same as what they are paying now on their home loan and short-term debts they are able to shorten their home loan by 18-years.
This is the first stage of any debt reduction system.
The Effect Of Paying More … Another $100 Per Week
We then decided to look at what would happen if they could find an extra $100 per week to pay towards their mortgage.
By increasing the mortgage payments by $100 per week we were able to shave another 3-years off the mortgage and save another $59,719 in interest costs (total savings of $329,636).
Of course they were keen to consolidate their debt plus decided they needed to look at their budget and see where they could save some money to put towards reducing their mortgage.
Find Money Within Your Household Budget
Most of us are wasting some money!
It may be that we are buying coffees, buying our lunches or spending money on some unnecessary things. We all do it and make excuses for ourselves, but if we are really serious about paying our home loans off faster we need to consider where we can find a little extra money – and most of us can without affecting our lifestyles.
We recently wrote a blog on the real cost of coffee which was really about how the money spent on your coffee could help pay your mortgage off sooner. This was a popular blog written on our Mortgage Link Blog.
But any budget will take a little discipline.
Anyone can set a budget, but often we need a little help to ensure we stick to a budget.
Stick To Your Household Budget
If you are serious about paying your debts and mortgage off faster then you need to consider setting up your mortgage to achieve this and setting a budget so you can control your spending.
As mortgage brokers we have found that using software to manage your budget is going to be more effective, but the software needs to be easy to use and have bank feeds so that you are not having to spend hours entering every expenses.
For this reason we suggest that you spend a few dollars on PocketSmith which enables you to set budgets on your actual spending habits and with automatic bank updates you can see in a snapshot what is really happening with your money.
Pocketsmith have a free version, but we tend to prefer the paid version with bank feeds as it is then always up to date.
You may be a little surprised at what you actually are spending your money on, and within the software you can set mini budgets to monitor specific areas of spending. Sticking to a household budget is all about making small changes in the way you spend rather than trying to make a huge change overnight.
Spending is a habit and you need to adjust that habit.
The best incentive to help adjust a habit is to be able to see the results and this is where we like the budgeting tools like PocketSmith.
Debt Consolidation Helps A Lot
As we illustrated, if you have any loans or credit card debt then it makes sense in most cases to add this to your mortgage so you can take advantage of the lower mortgage interest rates.
The Sorted website has some calculators that can show you how to get rid of expensive debt, or you can speak to a mortgage broker and request a mortgage review which will highlight the savings that you might be able to make, and therefore work out how much sooner you could pay your mortgage off. A mortgage broker should also be able to review your mortgage interest rates as lower rates can make an impact too. At Mortgage Link we also like to work with you to make sure that you stick to your plan and therefore actually see the results.
Many people have bigger short-term debts and credit card debt and in these cases the savings can be a lot more significant.
Do You Need To Change Banks?
Some mortgage brokers or debt reduction specialists will encourage you to refinance your mortgage and shift to another bank and while this may be the best thing to do it is not always. Most banks and non-bank lenders will allow you to set your mortgage up in a manner that allows you to pay your mortgage off sooner.
Of course there are times where it makes sense to change bank, but often mortgage brokers or debt reduction specialists will be suggesting that you do change banks so that they can be paid a commission.
You should only change banks if you are unhappy with your bank or can get a better or more appropriate mortgage with another bank or non-bank lender. The key is to get the mortgage structured in a way that suits and to get competitive mortgage interest rates.
Speak To A Mortgage Broker
Mortgage brokers are always looking for ways to help you (their clients) save money on your mortgage and many have tools that they can use to show you how easy it is to pay your mortgage off faster. You should also be looking to consolidate any other more expensive debt and use the savings to pay your mortgage off even faster. You should also look at what you are spending money on now and see if you can identify ways to save money which can then be added to your mortgage repayments.
Remember that at Mortgage Link we offer advice on debt consolidation and mortgage reduction strategies for free.
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Did You Find This Useful?
We hope that you did find this information on debt reduction systems useful.
As we have discussed, there are no secrets to debt reduction and the ways we use can help most people save money without incurring the costs that some “so called” debt reduction specialists will charge.
If you found this useful we suggest that you request a free review for yourself and also ask if you could you “share” this article or “like” this article so your Facebook friends get to see it too.
This is one way we can really help people…