It’s the aspiration of most Australians to own a home – but one that appears increasingly more difficult.
While the most common loan terms are taken over 25 or 30 years, shedding a few years could make a significant difference in the overall sum of your loan.
Karen Philips and her husband managed to be mortgage-free in just seven years. Working as a counsellor, Karen and her husband, a primary school teacher, were on average salaries from $60,000 to $75,000.
Purchasing a home together at the price of $320,000, 18 years ago, they offered a 20% deposit and were left with little savings.
Although they didn’t have a lot of funds behind them, planning, researching and smart investing helped them quickly pay off their mortgage.
Get an offset account
For Karen, having an offset account as a feature of her home loan made a significant difference. But she warns that the tool can be useless if you are not disciplined.
An offset account is a savings account or an everyday account which is linked to your home loan account. It works to ‘offset’ your home loan balance daily, meaning you are only paying interest on the difference between your principal loan and the balance in your offset account. You can offset your home loan by 100%.
Under this account, you have the ability to withdraw or deposit money as you please. If you are regularly taking money out of this account, or don’t have a lot in there, the benefits will be minimal.
“We had friends who did that and sold their home 20 years after purchasing, owing the same amount,” says Karen.
Wise spending, active saving
“We saved money by living smartly,” says Karen.
She and her husband stopped buying coffee, pre-packed their lunch and cut down on their drinking. They still went out for dinner once a week but made conscious decisions to save. And, when the tax return came in, this went straight towards the mortgage.
Shop around and consider refinancing
Karen did not reap the benefits of her loan without shopping around first. She says to “be ruthless and insist on the best rate, otherwise move elsewhere to another lender.”
She cut costs by avoiding application fees and high ongoing fees for extras like an offset account, unless you plan to use it effectively.
Making the most of their equity, Karen and her husband purchased other properties.
“We always took a principal and interest loan, never interest only,” said Karen.
Over a decade, the pair bought and sold a number of units in suburbs they believed were cost-effective, with good prospects of gaining value. Knowing Sydney was outside their price range, they widened their scope.
“We purchased many units we never actually saw or went inside, we purchased without emotion, only with logic,” says Karen.
“We would calculate the cost of property, the interest we would pay over five years, stamp duty calculated over five years, and assess if expected rise in value made the investment worthwhile.”
To overcome the hurdle of distance, the couple used real estate agents to select reliable tenants who would look after the property and keep up with rental payments. Selling these properties left the two with profit to pay off their mortgage.
Words by Michelle Elias
NB: The couple featured are not eChoice customers. Fees and Charges, Terms and Conditions apply.
Not sure which home loan is right for you? The right mortgage broker could make purchasing your next property easier. eChoice has access to hundreds of products across a panel of multiple lenders, so we can help you find a competitive mortgage.