Increase your repayment amounts
The simplest way to pay your home loan early is to increase the amount you repay. By repaying more than the minimum you can cut the overall term of the loan and save thousands of dollars in interest. The more you pay earlier on in your mortgage, the more you’ll save over time. You see, each principle plus interest repayment consists of exactly that… an interest component and an amount that reduces the amount you owe. Early in your mortgage the interest is the majority of this payment.
For example, a $400 000 mortgage at 5% over 30 years will have principle plus interest payments around $2150 per month. $1666 of this is interest, so if you can pay an additional $500 per month, you have effectively reduced your loan balance by double the amount, you will cut 10 years off your loan and save around $140 000 in interest!
You may not be able to afford an additional $500 per month, but even if you pay a little extra it will still make a difference. You can calculate your own savings on this calculator:
Be aware, some products may charge you an early payment fee for paying your loan in advance. These costs can be large, so it’s best to always check beforehand.
Consider how mortgage features can help
Think about how using an offset account or a credit card linked to your home loan might help you keep your loan balance low. If you’re looking for ways to keep your interest down, it’s worth investigating what other features your home loan comes with.
For example, an Offset Bank Account helps reduce interest costs on a home loan by linking the loan to a separate savings account. The balance in this account ‘offsets’ the home loan principal. Interest is then calculated on the home loan principal minus the balance in the offset account. If the principal on your home loan is $180,000 and there is $5,000 in your offset account, then interest is only calculated on $175,000. As an investment that’s like a guaranteed return- tax-free – and will far outperform any savings account (where interest IS taxed).
Try out our handy mortgage offset calculator to see how much you can save.
Take advantage if there are variable rate cuts
A lower interest rate will reduce your repayments, but if your lender reduces the interest rate, consider repaying more than the minimum loan repayment amount. This can help you save on future interest payments.
Don’t pay the interest-only
An interest-only loan might mean you’re able to make lower repayments for the first few years, but this means your repayments will be larger when it comes time to pay off the principal.
Be clever with tax
There may be an exception to the interest only tip above if you have an investment property. Its best to speak with your accountant about this, but in general rather than pay principle off your investment home loan where the interest is tax deductible, you may be better paying extra off your home loan to leverage tax savings and keep your investment loan interest only. To reap the full benefit though, you do need to divert the savings to your home loan and not just spend them! Everyone is different though, so speak to a professional about the best way to structure your debt for tax savings, and debt reduction.
If you’ve had your mortgage for 12 months or more, re-financing might be able to get you a better deal on your home loan. There may be costs associated with re-financing and it’s important to take this into account.
Consider split loans
A split loan allows borrowers to divide their mortgage into both variable and fixed components. You can lock in a low fixed rate on part of your loan, if you only want to limit exposure to the variable rate.
Explore your options
Before you sign on the dotted line, make sure you’ve explored all of your options. It’s worth looking into whether you can get a discounted loan rate with a financial package that includes special rates on other products and services.
With just a few easy steps, borrowers can significantly reduce the length of their mortgage and save thousands of dollars in the process.
If you’re interested in paying off your home loan sooner, give Roni a call on 0408 451 336!