Wondering how to pay off your home loan sooner?
Australian home loan interest rates 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 steps that can speed up loan repayments and reduce your loan balance quicker.
1. Make higher repayments
One of the easiest 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 of dollars in interest. A mortgage repayment calculator will quickly show what savings can be achieved.
If you are on a variable rate, most lenders will allow you to make unlimited extra repayments. However, if you are on a fixed rate, the amount of extra repayments that can be made is generally capped, with some lenders not allowing extra repayments at all. This is generally overcome using a split loan – with a variable and fixed split.
The example below show how borrowers paying an extra $100 per week could save a whopping $160,016 in interest and reduce the time it takes to pay off their mortgage by over 8 years!
2. 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 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.
3. Use an interest offset account
Most lenders allow you to package a mortgage with an interest offset account. An offset account allows you to reduce the amount of interest paid on your loan by offsetting the amount in the (offset) account against your loan balance. This is done by depositing your wages and other income, as well as your savings, into the account thereby reducing the balance interest is calculated on.
Below, we see how parking $20,000 savings in the offset account ‘against’ the home loan balance could save this borrower over $76,000 in interest and pay off their home loan 2 years sooner.
Note that you don’t earn interest on the funds in the offset account, and that offset is usually only available on variable rate loans.
4. Seek out lower rates
Most people seem to take the “set and forget” approach when it comes to their mortgage. With any sort of product there are promotional rates, specials and ever changing prices and features in the mortgage market. Ideally, people should be reassessing their loan every 2-3 years to see if their interest rate and loan product is still competitive and still meets their needs. By keeping on top of the latest rates in the market you can ensure that you always have the best available offer that suits your circumstances. This is a key advantage of using an Empowered Finance broker, as we will monitor your loan to ensure it adapts with you over the loan period.
5. 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. A mortgage is a type of secured lending. This gives the bank a means to recoup their funds if required, which reduces the risk to them and subsequently reduces the interest rate payable by the customer. Conversely, car loans, credit cards and other types of unsecured finance carry a higher risk to the bank, which they pass onto the customer in the form of higher interest rates and charges.
6. Set up a split loan
As eluded to previously, a split 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 rate. Extra payments can often be made on the fixed loan too, up to a limit specified by the lender.
7. Get a packaged loan product
Most lenders generally have a “basic no-frills” loan product, as well as a “packaged” loan product. The no-frill products are a simple home loan that has basic functionality and accessibility – which generally carries minimal fees. Whereas, a packaged product will generally carry an annual or monthly fee. However, packages generally carry a range of benefits – which can include interest rate discounts, complimentary offset accounts, waived application fees and free property valuations to name a few. Lower rates and less fees will obviously enable you to save money and time taken to pay off your mortgage
With just a few easy steps, borrowers can significantly reduce the length of their mortgage and save thousands of dollars in the process. At Empowered Finance, we can answer all your questions and provide you with the correct advice to ensure you make the most cost effective decisions.