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Monday, November 15, 2021

3 Ways to Reduce Your Mortgage Payments as a New Parent (With Actionable Examples)

Mortgages are annoying. They can eat up a big chunk of your income each month. But at least with a mortgage every month when you pay it you are owning more and more of your house, as opposed to rent which doesn't give you any assets in the long run. Here are some ways that you can make your mortgage payments lower, to help lower your monthly expenses.
As a new parent, you may be feeling the weight of your monthly mortgage repayments. If this is the case, then there are some steps that you can take to help reduce these payments. These 3 mortgage reduction strategies will not only make it easier for you financially, but they will also provide peace of mind at a time where stress levels are likely high!

1. Switch Mortgage Lender

Do you have a mortgage? Although it might be hard to imagine, if you were to get a new mortgage tomorrow, the rate would probably be lower than what you currently have.

If you ask your bank for a refinance they will most likely only give an interest rate on your current loan and it won't change from that point on. However, compare mortgage lenders and you can probably get a better rate which will save you thousands of dollars over the life of the loan. It is entirely possible for you to shop around and switch your mortgage lender in order to get a better deal. This is one of the most common ways that this is done, and it can save you literally thousands of dollars on interest repayments. There are many different types of mortgages on the market, so shop around and find the best possible offer for you.

For example, many lenders offer something called an offset account. Use this calculator to see how putting surplus cash into an offset account will save you thousands of dollars over the course of your home loan.

2. Increase Your Mortgage Repayments

In simple terms, increasing your mortgage repayments equates to paying off your debt faster.

Often, when people take out a mortgage they don't consider how it can affect their future plans. For example, let's say that you took out a $500,000 mortgage with monthly repayments of $2500 and planned on paying off your home within 15 years by increasing your payments in five year increments:

Year 1: Pay $3083 (increased from $2500)

Year 5: Pay $4689 (increased from $3083)

Year 10: Pay $5012 (increased from $4689)

This means that in Year 10 you would have paid back almost half of the principal value of their loan. However, if you decided to add an extra payment per week (25%) to their mortgage over the five years, you would have paid back almost the full principal value by the same time. This means that instead of paying back $1025 per month for 15 years, you will pay back $625 every month reducing the length of your loan from 15 years to just seven years. This also means that you will save $2,500 in interest repayments!

Here are three examples on how you can apply this recommendation:

1. If you have a fixed rate mortgage with a term less than 5 years remaining it might be worth your while to refinance into another fixed rate loan after making some extra repayments so that you can reduce your term yet still keep your monthly repayments at roughly the same level. 

2. Consider refinancing your loan if you can secure a better rate on another loan with the same repayments as you currently have, especially if your term is coming to an end soon (we already covered this earlier in this article).

3. You could save money by making extra payments or even increasing your standard home loan repayments so that the length of time before you pay back the principal on your loan decreases. This will also reduce the interest amount that you pay over the life of the loan. If this sounds like something that would work for you then talk to one of our very helpful consultants who can help explain how it works and whether it's right for you!

If you have managed to save up some money and want to reduce the overall time that it will take for you to repay your mortgage, simply increase your mortgage repayments. This can make a huge difference, and because of this reason should be considered.

3. Pay Your Mortgage Off Early

Many (not all) lenders will allow a homeowner to pay off their mortgage early. Many homeowners may wish to do this, if they have the financial resources, for various reasons such as: interest rates are lower than when they originally took out the loan; or, because of an emergency that has come up and they need more money than anticipated. Fortunately, there is a relatively simple process to pay-off your mortgage earlier than expected.

Finally, the most effective way to save money with your mortgage is to pay it off completely. This can be done by making lump sum repayments, or increasing your standard monthly repayment. Because if you are able to do this, not only will you save thousands on interest repayments but you will also own your home much faster.

The first thing you should understand is that there's no downside for you in paying down your mortgage faster than required by the terms of your contract so it's always worth asking whether or not you can make additional payments at any time throughout the year. It only takes a phone call and some paperwork - and money paid towards the mortgage is applied directly to the principal. For example, if your current principal balance is $250,000 and you make a payment of $2,000; your new balance will be $248,000 (assuming no interest has been charged during this time period). There are ways where you can make extra payments per month without having too much impact on your budget.

The most common way to pay off your mortgage is by making bi-weekly payments instead of monthly ones. This process simply involves dividing up your regular payment in half and paying it every two weeks. So for example if your regular monthly payment was $1,200 then now you would be paying ($1,200/26) = ~$45.

So there you have four ways that you can easily save money with your mortgage. You should now be able to make smart decisions about how you repay your mortgage, and ultimately take control of the situation by saving more money for yourself in the long run.

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