Tips for paying off your home loan faster
Mortgage interest rates in Australia remain at historic lows, and the opportunities for paying off a mortgage early are better than ever. Used in conjunction with low rates, here are some extra tips that can amp up loan repayments and reduce your loan balance faster.
Some of these tips are obvious, some not so obvious, but by implementing one or two you will be surprised at how quickly it can reduce your home loan balance.
Make higher repayments
One of the fastest & most obvious ways to quickly reduce the balance of your mortgage is to make larger loan repayments. The minimum repayments required on a loan are calculated on the amount owing and the prevailing home loan interest rate. Repaying more than the minimum can cut the overall term of the loan and save you thousands in interest. Even an additional $100/ month can not only reduce your loan balance faster, but it will also save you in the amount of interest being charged to your loan every year.
Be aware that some lenders will charge you an early repayment cost for paying your loan in advance. This is particularly the case with fixed-interest loans, so it’s always best to check first. If you are not sure whether or not this applies to your mortgage, please give us a call and we would be more than happy to check for you.
Don’t take the rate cut
When a lender reduces the interest rate on its variable home loans, usually in line with a cut in the RBA’s official interest rates, your first instinct may be to reduce your loan repayments accordingly. However, by maintaining your loan repayments, you effectively repay more than the minimum loan repayment. As outlined above, this will help you cut the term of the loan and save on interest.
Make more frequent repayments
Home loans are often structured so that you make monthly repayments, but making fortnightly repayments instead can reduce the term of a loan and save interest. By making fortnightly repayments, you are paying the equivalent of half of your monthly repayment every two weeks. This reduces your loan balance by the equivalent of one extra monthly repayment per year. It will also lead to less interest being incurred by your loan because your loan balance will be lower at the time of the month that the interest is calculated.
Use an interest offset account
Most lenders allow you to package a mortgage with an interest offset account. An offset account is essentially another bank account which is linked to your mortgage account, which you can use to get paid wages and other income. You are still free to spend this money as required and without any limitation, but for the amount of time that your money sits in that account, it is offset against your loan balance, so you are not charged interest on that portion of your mortgage. In practice, what this means is that if your mortgage balance is $500,000, and you have $10,000 in your offset account, then interest is being incurred on $490,000.
Note that you won’t earn interest on the funds in the offset bank account, and that this offset feature is usually only available on variable rate loans.
Refinance to get a lower interest rate
Many borrowers only follow interest rates when they are about to make a new home purchase. Once they have found the best deal they take out a mortgage with a 30 year term and then stop following the home loan market. With interest rates constantly changing, it pays to monitor the latest rates. This is especially important in the current interest rate climate. Fees associated with refinancing can be minimal, but the potential savings can be huge. Contact us for a free home loan health check.
Pay both principal and interest
While you can make lower repayments by choosing an interest only loan, doing so means the principal component of the loan will never be repaid. While interest only loans are definitely useful for some customers, they are not a road to being mortgage free.
Pay fees upfront
When initially taking out a mortgage, some lenders will by default roll the establishment costs and charges into the loan. While this may help with your short-term budget, it’s worth paying these costs up front in order to prevent these fees from incurring interest charges.
Use your home equity
As the value of your home rises, so does the amount of equity you have in your property. Redrawing funds from your mortgage to pay for renovations and other costs can be a much cheaper source of funds than some other types of loans. Redrawing these funds will be charged at the same interest rate as your mortgage, which could be as low as 3.9% pa. As a comparison, some other types of loans, or funds raised from credit cards could be charged at 15% pa. Contact us if you would like to access some of the equity in your home.
Set up a split loan
A split loan, sometimes referred to as a combination loan, enables borrowers to divide their mortgage into both variable and fixed components. By doing this, you can not only make extra payments on the variable component, but also lock in a lower fixed interest rate. Extra payments can often be made on the fixed loan too, up to a limit specified by the lender. Splitting the loan will also give you the added advantage of a degree of stability if you are worried about interest rate increases in the future.
Get preferential interest rates on asset finance (e.g. cars less than 4 years old)
Depending on the type of asset you want to finance, and its age, you could be eligible for a lower interest rate if you are a home owner. This is generally applicable to cars less than 4 years old (but can also be applied to a number of other types of assets). Any savings made on your asset finance can then be contributed towards your mortgage. This type of finance is generally only available through a finance broker. Contact us for a rate & repayment quote.
If you have any questions regarding any of the information provided above, or would like to speak to one of our brokers about your home loan, please contact us on (08) 8224 0044.
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