Wanting to pay off your home loan sooner? Here are some tips you could do.
Australian home loan interest rates remain at historic lows, and the opportunities for paying off your home loan early are better than ever. Used in conjunction with low rates, here are some extra steps that can speed up loan repayments and reduce your home loan balance.
Make higher repayments
One of the easiest ways to quickly reduce the balance of your home loan is to increase 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 of dollars in interest. A mortgage repayments calculator will quickly show what savings can be achieved.
Home loans are often structured so that you make monthly repayments. But making weekly or 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 allows you to make the equivalent of one extra monthly repayment per year. Extra repayments will ensure the loan balance is lower at the time of the month the interest is calculated.
Seek out lower rates
Many borrowers take out a mortgage and then stop following the home loan market. With interest rates constantly changing, it pays to monitor the latest rates. If rates go down, contact your lender or broker and ask if they can reduce the rate on your loan.
Don’t take the rate cut
When a lender reduces the interest rate on its home loans, your first thought may be to reduce your loan repayments accordingly. However, by maintaining your loan repayments, you effectively repay more than the minimum loan repayment. If it’s possible to do so, this will help you cut the term of the loan and save on interest.
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 not be repaid while you are only paying interest.
Pay fees upfront
When initially taking out a mortgage, lenders will often roll the establishment costs and charges into the loan. While this may help the short-term budget, it’s worth paying these costs separately to lower the overall balance of the home loan from the start.
Use your home equity
As home prices rise, you build more equity in your property. Redrawing funds from a home loan to pay for renovations and other costs can be a much cheaper source of funds than others.
Set up a split loan
A split rate loan is when you break your mortgage into two loans – one with a fixed rate and one with a variable rate.
It’s something of an ‘each-way bet’. A split loan offers borrowers protection from rate rises (with the fixed portion of the loan) alongside the advantage of rate drops (with the variable portion of the loan).
Most banks will allow you to split your home loans from the outset, without having to pay for two separate loan applications.
Choosing the right kind of loan depends on your personal situation, earning capacity and long-term goals for your property. Speaking with a mortgage broker can help you to figure out the best way forward, and could help you save money along the way.
Use an interest offset account
With an offset loan, instead of receiving interest on your savings account each month, the account balance is offset against your home loan, reducing the amount of interest you pay over the life of the loan.
For example, if you have $20,000 in your offset account and $400,000 owing on your mortgage, the interest on your home loan is calculated on $380,000 instead of $400,000.
While your repayments remain the same, you’re paying less interest, which means you will be paying off more of the principal. If you can maintain a significant savings balance you can potentially pay off your mortgage years earlier than with another type of loan.
For home owners, another potential benefit is that the Australian Taxation Office does not always consider an offset account to be an interest-earning vehicle, which means you may not have to pay tax on any interest earned on your savings. Seek advice from an accountant or financial planner on the tax implications of an offset account.
Getting maximum benefit from an offset loan
Because your mortgage interest is calculated daily, many borrowers have their salary paid into an offset account, immediately reducing the interest payable on the home loan. You can still access the money in your offset account online or with an ATM card, but because every dollar is saving you interest, it makes sense to keep the offset account balance as high as possible.
Another tactic is to use a credit card to cover monthly expenses so you can maintain the maximum amount in your offset account. At the end of the month, simply pay off your credit card with the money in your offset account. The danger is if you’re not a disciplined spender you may end up incurring interest charges and cancelling out the savings benefit.
Need some Advice about loans?
A mortgage broker can help you find the right loan and secure the finance that’s most suitable for you. It will also ensure you avoid making mistakes.
Any questions you may have regarding loans, contact Annette Tothill on 0420 973 551.