How To Pay Off Your Home Loan Sooner Oct 16, 2019 | Home Loan A home loan is usually the largest debt for most Australian households. Paying it down faster than scheduled can literally save tens of thousands of dollars. The simplest way to reduce the total amount paid on your mortgage is to pay off your home loan faster than scheduled. To put this in numbers, using the hypothetical interest rate of 5%, a $500,000 loan paid off over 30 years accrues $466,279 of interest, whereas the same loan paid off over 25 years accrues $376,885 of interest. That means you could save over $89,000 by simply increasing your monthly repayments by a nominal amount! In this article, we give 5 simple tips on how to pay your home loan off sooner. Refinance to a lower rate Although refinancing may involve plenty of time and paperwork, it can be worthwhile to take advantage of discounts and lower rates on the market. If you maintain your payments as if you were paying a higher rate, you will see the loan balance decrease faster than scheduled and pay significantly less interest over time. Increase your minimum payment Rather than reducing your loan term, increasing your monthly repayment gives you flexibility in case you need to redraw on the loan or revert to lower payments in future. For example, over 30 years the minimum repayment on the loan above would be $2,684 per month, but paying just $239 extra per month can shave 5 years off your loan term and save almost $90k! Some fixed loans do not allow extra repayments, so check with your lender to ensure that this is a good option for you. Open an offset account An offset account allows you to place savings in a flexible account that offsets the balance of your home loan. For example, if you have a loan of $300k and place $50k in an offset account, the interest payable will be calculated on the balance of $250k. The offset account allows you to add or withdraw cash as needed, so is a good option for those needing quick and flexible access to funds. All major lenders offer an offset account with some variable rate home loans, so speak with your broker to see just how easy this could be for you. Make weekly repayments Weekly payments mean that your loan amortises faster than monthly payments, resulting in less interest paid over time. Even fornightly repayments can have a positive impact on the overall debt, so matching your repayments with your salary cycle can be very beneficial. Although the savings may seem minimal, watching your loan balance reduce so regularly can be highly motivating and keep you on track with your loan repayment schedule. Add lump sum payments Depositing your tax return, work bonuses or cash gifts directly to your home loan account reduces the balance immediately. These lump sum deposits can help save tens of thousands of dollars in interest over the term of your loan. Again, check with your broker to ensure that you won’t be penalized for making extra repayments. In summary, paying down your home loan faster than scheduled is the easiest way to save thousands of dollars and reduce the total costs. At Your Finance Adviser, we work with all of the major lenders to get the best deals for our customers. If you’re looking for strategies to pay off your home loan sooner, get in touch with our specialists and let us help you meet your financial goals today.
