For the Home Owner-Tips to get ahead and save interest
As I’m sure you’re aware, increasing repayments on your home loan, no matter how small an amount will help save interest and pay off your loan sooner. If you’re thinking ‘yes Paul I know that, I’ve heard it a gazillion times but where do I get the extra money from’?
Here’s some thoughts;
Future pay rises.
Decide that all or part of any future pay rises are automatically redirected into your home loan as extra payments. Ask your employer to do this for you so it all happens automatically before you get paid. After all, you’re already managing on your current income so you don’t need the extra money to fund your lifestyle. Save interest instead.
Reframe your living costs question.
How we ask ourselves questions affects the way we make decisions. Consider your initial reaction to these two questions:
a. Could we live on 80% of our current income?
b. Could we give up 20% of our current income?
The answers to these two questions should be exactly the same, but they’re not. We’re more likely to say yes to question 1 and no to question 2. Why, because question 2 highlights the loss aspect of the situation-losing 20 per cent. It’s known that losses weigh heavily, so in question 2 we focus on that pain. Question 1 is easy to answer affirmatively, since the question doesn’t mention losses at all.
To redirect some of your current living costs into your home loan to save interest, think about how you frame the question to yourself and you may get a positive answer rather than a negative.
Increase the pain of paying
There’s a proven direct link between the amount of pain we feel when parting with our hard earned money and the amount and frequency with which we spend it.
Paying cash gives the highest pain as we literally take money out of our pocket and hand it over to someone else. Moving further away from the direct hand over of cash by using a credit card or any other form of non cash payment, reduces pain. The affect on our bank account increases. We are likely to make bigger purchases more often and underestimate the amount we spend when using plastic rather than cash.
I’m not expecting we’ll decide to go back to paying cash for everything any time soon or at all. But, maybe we replace using our credit card with the next best ‘cash alternative’ a debit card.
The reward will be a reduction in spending and increase in money you could invest in reducing your home loan and you save interest.
Create an end of financial year rebate
This may not sound logically and to a rational economist it isn’t, but hey we’re humans not economists. Contact your employer and ask them to increase the amount of tax they deduct from your salary. When you come to do your tax return you will get a rebate from the tax office which you can deposit as a lump sum into your home loan. A tax office version of forced savings.
Use one or more of the above tips to trick yourself into diverting some of your income into your home loan, save interest and own your home years earlier. If you want to see how much you can save even with modest amounts of additional payments, click on the button and have a play around with our ‘Extra Repayments Calculator’