How To Get The Banker Off Your Back By Retirement

Retirement should be about freedom. But too many Australians are retiring without freeing themselves from the biggest master of all – debt and the Banks they owe money to.

Actually, debt need not be too painful. What you need to do is to make sure you don't have too much to start with, having the right loan and then paying it off as quickly as possible. Let’s go through those in a bit more detail.

Step 1 - Make Sure You Don't Have Too Much Debt To Start With

If you want to be out of debt by retirement, the 100% most effective strategy is not to have too much to start with.

Debt has become an Australian epidemic.

The trouble starts with one simple question: 

"What’s the most the Bank will lend me?”.

The question you should be asking yourself is:

"What can I reasonably afford?”.

Always borrow less than the Bank will lend you.  As a general rule, repayments should be less than 30% of your take home pay.

And if retirement is sneaking up on you, even if repayments are affordable, ask yourself:

​"Can I afford the level of repayments that will see the loan finished by my retirement?”

​These issues can be compounded when people buy stuff they don't really need with money they don't have.

Rule of thumb: When in doubt, do not buy it.

There is something to be said for not buying something if you do not have the money. What a concept, right?
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Too many people fall into the pattern of seeing something, then buying it, even when you really can’t afford it. That is not a strategy for success.

Step 2 - Choose The Right Loan

​Any debt you have should be at the lowest interest rate you can get, which will normally be your home loan.

Here are five things to consider when weighing up your home loan options.

1. Aim for the lowest interest rate
More than anything else, the interest rate is the most important consideration.

An interest rate even 0.5% lower could save you thousands of dollars in interest.

For example, a $300,000 loan at 4% for 15 years will require total repayments of $399,431.  At 3.5%, total loan repayments reduce to $386,037, for total savings of $13,394.

At 3%, the savings are $26,517.

Money much better in your pocket than the banks.

2. Principal and interest will pay off the loan
Most people get this type of home loan. You make regular repayments on the amount borrowed (the principal), plus you pay interest on that amount. You pay off the loan over an agreed period (loan term), normally 25 or 30 years.

You may have also heard of interest only loans. Avoid them! 
 
For an initial period (normally five years), your repayments only cover interest on the amount borrowed. You are not paying off the principal you borrowed, so your debt is not reducing. Repayments may be lower during the interest-only period, but they will go up after that. Make sure you can afford them.

3. Get the shortest loan term you can afford
Your loan term is how long you must pay off the loan. It impacts the size of your mortgage repayments and how much interest you will pay.

A shorter loan term (for example, 10 years) means higher repayments, but you will pay less in interest.

A longer loan term (for example, 20 years) means lower repayments, but you will pay more in interest.

For example, a $300,000 loan at 4% for 20 years will require total repayments of $436,306.  Over 10 years, total repayments are $364,482, for total savings of $71,824.

Again, money much better in your pocket than the banks.

4. Mortgage features come at a cost
Home loans with more bells and whistles come at a higher cost. These could include an offset account, redraw or line of credit facilities. Weigh up if these features are worth it.

For example, suppose you have a $300,000 loan with an offset account. If you can keep $20,000 of savings in the offset, you will pay interest on $280,000. That will save $600 in interest per annum at 3%.  But if your offset balance will always be low (say $5,000 or less) it may just end up costing you money.

Like so many things in life, simple tends to be best. Maybe that is how your home loan should be.

5. Compare home loans
With the amount you can afford to borrow, compare loans from at least two different lenders. Check the loan interest rates, fees and features to get the best loan for you.

Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options.

See what to keep in mind when using comparison websites.

Step 3 - Pay Off Your Loan Faster

Paying off your mortgage early will save you money and take a financial load off your shoulders. Here are some ways to get rid of your debt faster.

1. Switch to fortnightly payments
If you are currently paying monthly, consider switching to fortnightly repayments. By paying half the monthly amount every two weeks you will make the equivalent of an extra month's repayment each year (as each year has 26 fortnights).

2. Make extra payments
Extra repayments on your mortgage can cut your loan by years. Putting your tax refund or bonus into your mortgage could save you thousands in interest.

On a typical 15-year principal and interest mortgage, most of your payments during the first few years go towards paying off interest. So, anything extra you put in during that time will reduce the amount of interest you pay and shorten the life of your loan.

Ask your lender if there is a fee for making extra repayments.

Making extra repayments now will also give you a buffer if interest rates rise in the future.

3. Make higher repayments
Another way to get ahead on your mortgage is to make repayments as if you had a loan with a higher rate of interest. The extra money will help to pay off your mortgage sooner.

If you switch to a loan with a lower interest rate, keep making the same repayments you had at the higher rate.

If interest rates drop, keep repaying your mortgage at the higher rate.

Use this mortgage calculator and see what you will save by making higher loan repayments.
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Not sure how you can find the extra dollars, check out our comprehensive money management options here. I know one will work for you and get you on top of your money.

Example

​OK, so show me the money, I hear you saying.

Here is an example of how implementing a few simple steps can be life changing.

Enter Bill and Mary, who are both 50, have a $300,000 loan at 4% and are on target to have this repaid by the time they are 65.  They are keen to get the loan repaid quicker, so they can begin to boost their retirement nest egg.

​With the loan now repaid in 9 years, if Bill and Mary continue with the payments, but now put them in to an investment portfolio, and if they can earn say 5% on that investment, they will amass a nest egg of more than $220,000 by age 65.​

​So let’s summarise how Bill and Mary win by taking control of their situation.
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1. Their loan is gone 6 years early
2. They save around $45,000 of interest in the process
3. They build an investment of $220,000

Not bad going, I hope you agree. 

By getting on top of their debts, Bill and Mary now stress less about their retirement, are doing much better with their money, and I bet will live a better life too.

Conclusion

So, you’ve made the decision to get out of debt. So now what?

Start by sitting down and talking with your significant other (if you have one) and make a decision that you want to get this done.

A lot of people talk about how to change their financial lives, but never touch on the fact that if you or your spouse is not ready to change, it isn’t going to happen.

We understand!

We know what it feels like to be spinning in circles, thinking but not doing or maybe trying to figure things out by yourself. It’s frustrating and it’s also ineffective.

You’ve worked too hard to be feeling this way. Your happy retirement shouldn’t have a cloud hanging over it because you’re unclear of whether you’re making the right decisions or on the right track.

We can help you get on the same page and have confidence in your plan of attack.

Whenever you're ready....here are three ways I can help you get on track to a stress-free retirement.

1. Grab a copy of our free Ebook.

Its called “5 Money Must Do’s For The Over 50’s” and are the lessons learned from helping 1000’s of people find financial peace of mind over the last 30 years.

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​2. Follow us on Facebook and Twitter and sign up to our regular emails updates.
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They are great places for great ideas.

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3. Work directly with us

If you’d like to work with me and my team to move from stressed and frustrated to relaxed and on track, you can schedule a phone call here.  You’ll find out how we can help and if we are the right fit for you. 20 minutes, no obligation.

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IMPORTANT This information is of a general nature only and may not be relevant to your particular circumstances. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. See full Terms and Conditions here.