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How to cut your mortgage by saving and budgeting

Mark Bouris

With wages growing faster than inflation in the past year, you’d assume Aussie households are bringing in more than they need to live. But with the high cost of living, it seems that spending is also getting away from many people.

Where’s it all going?

According to the Australian Bureau of Statistics, one in seven households is spending more than it earns and the Australian Securities and Investments Commission has found that only 54 per cent of Australian householders know exactly what their money is spent on.

Don’t write this off as a problem affecting only low-income people; almost 8 per cent of the country’s wealthiest households are living on credit. ASIC estimates that Australians spend $69,000 per household annually - $1290 a week - on living costs.

There is a cliche from the older generations that a penny saved is as good as a penny earned. In other words, when you reduce your costs it’s as though your revenues have been increased.

In business, you can show this in your financial statements, but what about householders? Where can you boost your income by cutting your costs?

Big items first

I suggest you start with the largest items in your household budget - and for most readers, that will be your cost of housing. ASIC says that just under 20 per cent of that average weekly household expenditure of $1290 is spent on housing: rent, mortgage and maintenance.

One solution is to refinance into a cheaper mortgage. However, there’s another way to reduce that overhead: try finding several small household savings and putting them back into your mortgage in a monthly payment. You could save thousands.

A family with a $350,000, 30-year mortgage paying the average variable rate of 6.44 per cent (as at September 2012) could take almost a year – and $15,000 in payments – off that mortgage by making an extra monthly repayment of just $20.

Because they’re reducing the compounding effect, even a small amount added to the mortgage can make a huge dent in a home loan. And it’s more common than you think: about 50 per cent of Australians are ahead of schedule on their mortgage repayments.

Invisible savings

Of course, to have extra money to put into the mortgage, you need to find savings. Every household has potential savings under their noses - savings they can’t see, won’t see, or won’t act on.

These are not complicated. If you work in the city, chances are you’re spending about $12 on a sandwich and drink for lunch every day. Let’s say you decide to cut back and bring some of your lunches from home. If you pack a lunch just twice a week, you save $24, or $96 a month - less the cost of the ingredients from home.

I used our monthly repayment calculator on ybr.com.au and found that putting the cost of two lunches a week into a $350,000, 30-year mortgage on the big banks’ average variable rate of 6.82 per cent equates to a saving of $65,500, and takes 42 months off the loan.

Cutting just one cup of takeaway coffee at $3.20 a day equates to $69 in savings a month. If you put this into your mortgage, you will reduce your home loan by 32 months, saving $50,532.

People find it easy to think about cutting one cup of takeaway coffee, but what about the less obvious cost savings?

Audit yourself

One way to take control of your costs is to conduct regular audits on yourself, to see where the apparently insignificant costs are occurring. What about your phone costs? Many people have mobile phones but they also have a landline. Do you need both?

And what about your internet plan? Do you need that size of download? With the speed of change in telecoms, it’s not impossible to save $50 a month between your internet and phone bills, and that can go on the mortgage, too.

Other opportunities to save are out there: shop for packaged holidays rather than buying airfares and hotel rooms separately; reduce the number of times you eat out from, say, twice to once a week and you could save $300 a month; reduce the regularity of your dry cleaning; have either cable TV or DVD rentals - not both; time your petrol refills to the cheapest days, and shop for groceries at a lower-cost supermarket.

Save $200 a month

Just about any household can find $200 a month in savings. If you put this on your mortgage each month, you will save $116,966 - and reduce the term of the loan by more than six years.

This is not the stuff of financial masterminds – it’s about cutting small costs at home so you can reduce the biggest cost of all.

Find an online calculator and start increasing your income by reducing your costs.

Mark Bouris is executive chairman of Yellow Brick Road Wealth Management. See ybr.com.au

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