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 These days with home loan interest rates on the rise and petrol prices being some of the highest we have ever seen, there is greater pressure on all of us to manage our money as efficiently and as economically as possible.

Many items that appear on our weekly shopping lists seem to defy gravity. Most goods and services we buy as consumers offering very little latitude to control these rising costs. Things like fuel for the car, electricity, council rates and the weekly groceries seem to be completely beyond our power to regulate - sure we can choose to use the car less or substitute a few items on the grocery list to help reduce costs, but unfortunately these have very little effect on our overall bottom line.

This, however, I am happy to say is not the case with the other major costs in our lives…

Wouldn’t it be great to be saving over 40% on everything you buy - food, petrol, clothes, everything. To put this in dollar terms, this would mean a saving for the average family of over $12,500 a year. How would you like to be saving over $1,000 a month on your bills?

Many people I talk to say these sorts of savings are impossible, the idea of having no debt at all, apart from your mortgage and being able to pay that off in half the normal time seems unbelievable. Let me assure you it is possible, it is simple and it can be done without any sacrifice to you lifestyle. By making a few simple changes to the way you organise your money you will (depending on your situation) save $100,000 or more in interest repayments on your mortgage, your personal or car loans and

even your credit cards compared to the standard repayment method that your lender prefers.

I have helped a lot of people get started on making this sort of saving possible, I call it Smart Mortgage Reduction, and I have seen it work in practise time and time again. You don’t have to be an economic genius or a financial Wiz-Kid to make it happen. The rewards can be great and the process is very simple. 

Want to find out how? Then read on.

The best way to explain how Smart Mortgage Reduction works is to use an example. Let me paint you a picture of a fictitious family called the Browns.

David & Robyn Brown are a typical couple with two school aged children. They live in their own home and are paying off a 30 year mortgage. They have lived in their home for about 3 years. During that time they have repaid about $6,000 off their mortgage principal (they originally borrowed $291,000 to buy their home), their current mortgage balance is $285,000.

Like many people, they also have a $15,000 car loan (costing $445 per month), and a credit card that currently has a balance of $7,000 (it gets repaid by about $210 per month). The Browns total monthly repayments for all three debts are $2,887 per month.

Now apart from the three bills mentioned above, David & Robyn and the two kids need (like the rest of us) to eat, wear clothes, watch TV (the kids need “Fox” of course), go to the Doctor occasionally and maintain a reasonably comfortable lifestyle. The family budget excluding the mortgage, car repayment and the credit card is $29,016 per year (or $2,418 per month).

Both David & Robyn work full time, David is a Sparky (an electrician) and earns $50,000 a year, Robyn is a shop assistant and earns a little over 30,000 per year (both incomes are quoted in before tax dollars).

They earn enough to get by, though by the end of the month when all the bills and expenses are paid for, there is not a lot left over to do anything with (about $37 left over per month).

Now a friend of David’s (Peter) told him about Smart Mortgage Reduction. Peter had been using a Smart Reduction strategy over the past 12 months and told David he was very happy with the results. Peter introduced David & Robyn to a good mortgage broker (modesty forbids me to name him) to find out how it all worked.

The first thing that needed to be done was to consolidate all of their debts. Debt consolidation refers to a process where you pay off all (or most) of your debts by refinancing your home loan and combining debts (things like car loans and credit card debt) into your mortgage.

Now this may seem a little like rearranging deck chairs on the Titanic, but it works this way.

David & Robyn’s mortgage balance is $285,000, they owe $15,000 on their car loan and $7,000 on the credit card, a total debt of $307,000. The total repayments for these debts per month (as we mentioned above) is $2,887.

We know the Browns have lived in their home for about three years and in that time they have developed some equity in their home (ie. Equity refers to the difference between the value of your home less what you owe on your mortgage).

David and Robyn can access some of this equity to repay the car loan and the credit card debt by refinancing the mortgage and leaving only the increased mortgage repayment to handle each month.

The new (and increased) mortgage amount that the Browns need to cover the other two debts was $307,000, to this they add another $3,000 to pay for any loan costs and government stamp duty etcetera. So the new mortgage was $310,000.

The new mortgage like the old one is 30 years, the interest rate was fixed for 5 years at 8.14%. The repayment amount for the new loan is $2,305 per month, an increase of $73 per month on the old mortgage.

The good news however is that the new repayment is a saving of $582 per month. David and Robyn also avoided any “out of pocket” costs by borrowing a little extra to cover any of the new loan’s set up costs, their new loan facility literally pays for itself.

Now to take full advantage of this change over and the debt consolidation, we need to be paying off more than just the minimum monthly mortgage repayment of $2,305. Remember the Browns can now afford to pay a bit extra towards their mortgage because of their improved cash flow of $582 per month.

If David and Robyn decided to use around half of their spare $587 per month, let’s say $200 of their excess cash flow to help start a mortgage reduction strategy, their loan term would no longer be 30 years, they will pay off their new mortgage in slightly less than 22 and a half years. This works out to be a saving of over 8 and a half years and $152,371 in loan interest, and this saving is only compared to their old mortgage – the interest saved on the car loan and credit card is more again.

Let’s take this one step further and assume David & Robyn really wanted to aggressively pay off their mortgage and devote the entire $582 per month of their improved cashflow back into the home loan. The savings are $273,250 in home loan interest, and completely paid off in 16 years, or 11 years sooner compared to their old mortgage.

This is how “Smart Mortgage Reduction” works. This combined with a 8.14% locked interest rate is my safest and most conservative mortgage repayment strategy.

The reason I say safe and conservative is as far as the Browns are concerned absolutely nothing has changed. Their budget is still exactly the same, they still pay $2,887 per month off there bills (or bill in this case, their home loan – they no longer have any other debt to worry about).

The only change is that they will pay off their entire debt, almost 11 years sooner, saving over $273,000 plus in loan interest and have an eleven year early mark from their mortgage (or time off for good behaviour depending on how you see it).

An addition benefit is a much simpler financial structure to manage, due to having just the one bill, their home loan.

Don’t leave your hard earned money sitting on the table just because you are paying off your loans in the old fashioned way.

Smart Reduction is safe and will save you a bundle. Thanks for taking the time to read this article.

All the best to you and yours.

Jamie Wadley
HunterWide Home Loans

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