Five Ways to Increase Loan Repayments
Paying off a mortgage can seem relentless – every payment counts of course, but it can seem to be taking forever to make a dent. Here are some simple ways you can increase the amount you pay off and own your home sooner.
Reducing the principle on your mortgage as quickly as you can means paying less interest, so your future payments are going even further towards reducing that principle.
To find the ideal balance between the extra repayments you can afford to make and the time this will shave off your mortgage term, use a mortgage calculator.
For example, on a $350,000 loan at six per cent interest, a monthly repayment of $2100 will see a total term of 30 years and a total cost of just over $750,000, while paying just $500 per month on top of that will bring the loan term down to just under 19 years and the total cost to just over $580,000.
Boosting these monthly payments by a further $400 to $3000 will see the loan paid off in less than 15 years – halving its term.
So, here are five simple ways to increase those mortgage repayments.
1. Ignore the bank
Well, sort of. Don’t pay any attention to the amount that you are told is the minimum repayment, as long as you pay more. Work out the most you can afford to pay, think of this as your minimum repayment, budget for it and stick to it.
2. Treat yourself
Think of every step you take towards reaching your goal of owning your property outright as a way of treating yourself. Sure, an expensive bottle of wine is nice, but doesn’t taking a year off your loan taste pretty sweet, too?
Every single increase to your income, no matter how small, should be channelled into the debts that are incurring the highest interest. If this is your mortgage, send it there. Do the same with your tax returns, any bonuses at work and even cash gifts.
3. Track your spending
Download an app to track what you are spending your money on, and trim where necessary, channelling the savings into your mortgage payments.
Think of all those little things you don’t really notice yourself pulling out your wallet for. In one week, that extra coffee on Monday morning, a sandwich from the cafe instead of one you have made yourself, that round of shots you probably shouldn’t have shouted on Friday night and getting your nails done on Saturday add up to $150. Over a month, that’s $600. Increasing a monthly repayment from $3000 to $3600 could trim more than 10 years off the term of a $500,000 loan. Now how much do you really want that coffee?
4. Eyes on the prize
Watch the forecast term on your mortgage – seeing it go down will motivate you to work even harder.
5. Talk to an expert
Talking to your credit adviser about refinancing options could reveal a way to pay down your debt sooner even without increasing repayments. A credit adviser will be able to look into whether you may get a better interest rate or lower fees with another lender, or even with your own, and will be able to help minimise any refinancing costs.
This is especially important each time your goals or your financial circumstances change. If you are earning more than when you took out your loan, you have paid off a personal loan or a credit card since that time, or your property’s value has risen, your credit adviser may be able to negotiate a far better deal than the one you are on.
For example, if your credit adviser negotiated your interest rate down from seven to six per cent on a $500,000 loan, on which you are making $3500 monthly repayments, your loan term could drop from just over 25 years to 21 years.
An MFAS Approved Mortgage Consultant is with you for life to make sure you’re always getting the best deal you can from your mortgage. Work with a MFAS Mortgage Consultant to help you own your home outright soon.
When was your last home loan check?
Circumstances can change, leaving your home loan less suitable than it was originally. A home loan health check can reveal if you’re paying too much.
Your MFAS Mortgage Consultant can do a full home loan health check for you either in person or over the phone. They will check if your loan is still competitive and still suited to your individual needs.
Having an expert do this for you can also take the stress out of the process for you. It is advisable to get this check done at least once a year, or if your circumstances change.
Questions to ask
Be aware of what you want checked. Think about the following when you speak to your adviser:
• Am I paying an unreasonably high interest rate?
• Am I paying high fees?
• Am I happy with the service I receive?
• Does my loan give me the features I need?
• Am I paying for features I don’t use?
• Have my financial circumstances changed
A home-loan health check will generally cost you nothing and could save you thousands. Your home loan features could be improved or you could find yourself with a lower interest rate. A better payment structure could also be introduced, making your repayments more manageable.
Checking the state of your current loan could uncover the possibility of taking out additional finance, which can consolidate any other debt you may have or help you purchase an investment property.
Contact your MFAS Approved Mortgage Consultant to organise your home loan health check.
Borrowing Money – Are you over-leveraged?
Borrowing can help you meet your long-term goals for a home or education. However, excessive borrowing may lead to financial trouble.
In my opinion, the only ‘healthy’ loan is Mortgage Loan. Even then, one needs to take precaution to ensure it is not overly stretched or overly-leveraged.
Here are some key issues to consider to avoid getting into debts.
1) When Should I Borrow?
Before using your credit card, taking a loan to buy a car or a durable (a big item), ask yourself the following questions:
– Do I really need it? Or is it something that I merely want?
– Must I have it today?
– What will happen if I do not buy it today?
– How have I managed so long without it?
If you have decided that it is something you really need, assess if you need to borrow to purchase it. You will be better off saving for it and paying in cash to save on interest costs, if the item is not something you require urgently.
Alternatively, take a smaller loan so that you do not overstretch yourself financially. Look at the total borrowing costs including the total interest payable before you borrow. Only borrow if you are sure that you can afford the loan payments.
Things to note – 0% Interest or Interest Free Instalment Plans
An increasing number of merchants are offering instalment plans with zero interest charge if purchases are made through a credit card. You pay the instalments using your credit card over a period ranging from a few months to 48 months, depending on the product. Unlike a hire purchase plan where you have to pay interest, such instalment schemes do not charge any interest and allows you to pay the same price as someone who pays the whole sum upfront in cash.
But these 0% plans come with conditions that you should be aware of. As a start, you pay zero interest only if you pay the agreed instalment promptly and in full every month. Otherwise, you may be charged an interest rate as high as 24 % a year on the sum that you roll over. You may also have to pay a late charge if you do not pay promptly and pay interest on new credit card transactions once you roll over your previous balance. You should also be aware of other service fees which could be levied. There may also be additional penalty fees if you decide to cancel your card before the repayment period is over or for paying off your outstanding credit early.
2) What Are The Things I Should Consider If I Borrow?
• How much to borrow?
It pays to be cautious. Lenders may offer you a bigger loan if you qualify for one. Borrow only up to the amount you are comfortable with. Even small differences in interest rates can make a big difference in the total amount you will need to pay, especially in the case of long-term loans. When assessing how much to borrow, ask yourself the following questions:
– Can you afford the instalments? Work out your monthly income and expenses to see if you have any remaining funds to pay for the loan instalments. You should make it a point to pay every instalment promptly.
– What would your total monthly long term debt commitments (e.g. mortgage payments, car payments, credit payments for outstanding balances, etc) be if you take up the loan? As a guide, your monthly long term debt commitments should not exceed 35% of your gross income. A “Borrowing Money” worksheet which can help you calculate your maximum debt load is available at www.moneysense.gov.sg.
• Protect your credit standing
Lenders use credit reports, containing your credit history and current financial situation, to decide whether to lend you money. A report that shows defaults or late payments – even 30 days late – might lower your chances of getting a loan or require you to pay a higher interest rate for a loan.
The Credit Bureau (Singapore) Pte Ltd (CBS), which issues the credit reports of consumers, obtains information from its member financial institutions and public sources such as bankruptcy data.
It is therefore important that you maintain a good repayment record. Here are some tips on maintaining a good credit report:
– Always keep track of the payment dates for your credit facilities and remember to pay before the due date. Pay all your monthly outstanding credit in full to avoid incurring interest and penalty charges.
– Avoid multiple sources of credit. It is easier for you to keep track of your repayments when you have fewer credit facilities.(Consolidate your credit cards/loans?)
– If you are unable to meet the payment deadlines, let your financial institution know beforehand and explain the reasons to them.
You can obtain a copy of your credit report from CBS. To find out more about CBS, visit www.creditbureau.com.sg
• Shop For the Best Deal
When you borrow money, you have a right and a responsibility to know the loan’s terms and conditions. Ask questions. Compare interest rates and fees. Know what is at stake if you do not make your payments. Before you borrow money, ask these questions:
– What is the effective interest rate and advertised rates ?
– What are all the fees involved?
– How much would I have paid in interest when the loan is paid off?
– Can I pay it off early without penalty?
Shop around and compare. Always seek clarification when an offer sounds or seems too good to be true. You can then check your understanding against what is printed and explained to you. Always read and understand the fine print and terms and conditions. Seek clarification when in doubt.
3) How Do I Manage My Loan?
All loans take time to pay off. Here are some tips to help you along
– Increase your regular repayments : A simple way to get ahead on your loan is to increase the amount of your repayment. You will be surprised how much of a difference a small increase can make.
– Make lump sum repayments : If you have some cash coming your way, you can use it to make a lump sum repayment on your personal loan.
Both of these ideas will reduce the amount owing on your loan and therefore decrease the overall amount of interest you will be charged. Do check however if there are any penalty charges for increasing your regular payment or making lump sum repayments during the tenure of the loan. You are also likely required to give the banks advance notice before increasing your regular payments or making a lump sum repayment.
– Reduce debts: Pay off the debt with the highest interest first. As credit cards generally charge higher interest rates, it is best to pay the bills in full each month, and not just the minimum sum. If you have difficulty paying your credit card bill in full, pay as much as you can. You should also review your spending patterns and make adjustments to spend within your means. The faster you reduce your outstanding balance, the less interest you will have to pay.
Tips for consumers:
i) Pay your instalments promptly.
ii) Your monthly long term debt commitments should not exceed 35% of your gross monthly income.
iii) Always keep track of the payment dates for your credit facilities and remember to pay before the due date. Pay your monthly outstanding credit in full to avoid incurring interest and penalty charges.
iv) Avoid having multiple sources of credit. It is easier to keep track of your repayments when you have fewer credit facilities. (Consolidate…)
v) If you are unable to meet the payment deadlines, let your financial institutions know (in advance?) and explain the reasons to them.
Food for Thought : Some Controversies
1. Concept of using Other People’s Money
In the present buoyant property market, many are attempting to borrow maximum and the 90% financing limit is quite unique for Singapore.
Many investors (Type A : High Risk Appetite) capitalize on the concept of using Other People’s Money (OPM), in this case the loan financier (banks or financial institutions) for property investment. They believe in getting high gearing as minimizing initial cash will give them maximum opportunities to buy more properties in the hope of capital appreciation. Many are even looking into selling their options.
A word of caution particularly to those who has no holding power : do not attempt to imitate the Type A Investors. These people are prepared to lose their 1% option money in case their options cannot be sold on time and/or they can’t get a loan as their Debt Servicing Ratio (DSR) has exceeded limit. Or it could be a situation where the Type A investors do actually have holding power
2. Should I borrow More Or Just Enough for Housing Loans
Some reckon that you must not borrow more than what you need even though your borrowing limits may allow you to borrow more. However, in the case of housing loan, some Accredited Mortgage Consultants have actually suggested to borrow slightly more than what you need. It is definitely not for higher referral fees but more as a ‘protection to the client.’ Why is that so? This is particularly true if the home loan client do not have excess cash/CPF buffer for installments. It is probably advisable to save the access cash in the bank in case of urgent financial needs for installments. Usually the banks are less sympathetic towards loan installment defaults.
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