With higher home prices and larger mortgages, more Australian’s have a higher level of debt and bigger home loans to pay off. However, with home loan interest rates being the lowest that they have been in years, now is the perfect time to shave more off your home loan. Let’s look at how you can pay off your home faster.
When you sign-up for a home loan, you have agreed to pay a monthly payment to repay the loan over the specified term. This repayment is usually the minimum amount needed. Therefore, if you have extra cash, it’s a good idea to pay more off your home loan than you need to. This will reduce your principal and subsequently the amount of interest that you pay over the term of your home loan.
If you pay your home loan monthly, then look to pay this either weekly or fortnightly. By changing the frequency of your home loan repayment you are shaving more off the principal of your home loan, as you will pay more per year on your mortgage.
How? Well, there are 12 months in a year, some months are five weeks long, and others are only four weeks. Therefore, if you pay your mortgage weekly or fortnightly, you are actually making an extra payment on your home loan in a year. For instance, if your home loan repayment is $1,000 per month, and you pay weekly or fortnightly, then you will be paying off $12,000 in a year. If, however, you make a weekly or fortnightly repayment, then you will end up paying $13,000 over the year.
If you find that you are earning more and have a higher residual income each week, then ask your lender to adjust your level of repayment. For example, your minimum monthly home loan repayment might be $1,200, but you may find that you can afford to pay $1,500 a month off your loan comfortably. So rather than spending this money, you contact your lender and ask them to change your repayment amount to $1,500 a month. Over the term of a 25-year loan for $300,000 at 5%, this extra $300 a month payment will shave 6-years and two months off your loan term and save you $63,763.89 in home loan interest.
If you do not have an offset account linked to your home loan, then it’s time to ask your lender about setting one up. A 100% offset account will reduce your home loan principal by the amount that’s held in the account each month. So let’s say you have $39,000 in your saving account and your mortgage balance is $250,000. This means that the $39,000 in your offset account reduces your mortgage to $211,000. Therefore, you will only pay interest on this amount, which can save you tens of thousands in interest over the term of your loan.
A home loan redraw facility allows you to pay more off your mortgage when you have the extra funds. These extra payments are then held in the redraw, which you can access at any time if needed. This facility gives you freedom to make extra repayments without you regretting this decision should you find yourself short of funds at a later date. It’s also an excellent way to save for schooling, a new car or even a holiday, but your money works for you as you are saving.
Compare your home loan to others on the market. If your interest rate is higher than other loans, then it might be time to consider refinancing. Mortgage brokers suggest that if you’re paying more than 4% interest, then look at other lenders. The home loan market is competitive, and many lenders will shave 0.25% off an advertised loan rate just to gain your business, so do not be afraid to shop around.