10 Ways to reduce your home loan faster
10 Ways To Reduce Your Home Loan Faster
Avoid unnecessary fees, get a low interest rate and use flexible features to maximise your mortgage repayments.
Here's the hard truth about mortgages: most lenders want you to take your time paying them off. The longer you take to repay your loan the more interest you pay.
Here are ten ways to pay off your mortgage faster and get your home loan debt under control.
1. Keep your interest rate low
There are two parts to a home loan: the principal and the interest. The principal just means the amount of money you borrowed, and the interest is what the lender charges on top of that. The lower your interest rate, the less interest you pay.
Let's look at a quick example. Say you borrow $350,000 to buy a home and you get a 30-year loan with an interest rate of 3.5%. Your monthly repayments would be $1,571. But what if you switched to a home loan with an interest rate of 2.80%? Your monthly repayments would drop to $1,438.
That's a difference of $133 a month or $1,596 a year. If you decide to use those savings towards paying off your home loan faster, you'll end up saving even more.
2. Increase the frequency of your payments
By paying fortnightly or weekly, you can reduce your loan term. For example, on a $350,000 home loan with a 30-year term and an interest rate of 3.5% per annum, repayments would be $1,571 per month. However, if you paid fortnightly, you would save nearly 4 years in repayments and over $31,000 in interest.
3. Increase regular repayments
On a home loan of $350,000 with a 30-year term and an interest rate of 3.5% per annum, repaying even an additional $100 a month would save you 3 years in repayments and around $24,000 in interest.
This extra money reduces your loan principal further, meaning you pay less interest. Not all home loans allow you to make extra repayments, but if yours does then it can be a very effective way to get out of debt faster and save money.
If you are serious about paying off your home loan faster, look for one that does allow extra repayments.
4. Use an offset account
An offset account is simply a savings account linked to your home loan. If you have a $350,000 home loan and had $10,000 in the offset account, interest is only calculated on a $340,000 loan balance.
Your monthly repayments will stay the same and this means you're paying off less interest and more of the loan itself. If you need to spend this money you can simply withdraw it.
5. Deposit lump sum payments
Use bonuses or tax refunds to reduce your loan faster by depositing these lump sums into your home loan account. This has a similar effect as increasing your repayments, by reducing your principal results in paying less interest and reducing your overall loan term.
6. Know what you are spending
It’s time to understand where your money is going by tracking your spending using one of the many Cloud-based solutions available. Now, before you start to itch, I didn’t mention the B word. I’m not talking about a budget here. Instead, it’s about becoming aware of how you’re spending your money and knowing exactly where it’s going.
7. Consolidate high interest loans
You may have credit cards, personal loans that are at a higher interest rate. Consider consolidating these to a lower rate of interest. It is important to note here, that you do not only pay the minimum required as you may extend your loan term overall, therefore costing you more. If you consolidate short term loans into your home loan you do not want to be now paying these off over a 25- or 30-year loan term. When considering this strategy determining the right repayment so you do actually save money. The repayment will often be less than what you are paying on the high interest debts therefore improving your cashflow.
8. Reduce the term of your loan
When taking out a home loan consider your loan term. Why take an original term of 30 years if you are comfortable with a 20- or 25-year term? By taking a longer term you are only increasing the amount of interest you pay back.
An alternative is to establish a 30-year loan term initially, however set up your loan repayments based on a shorter loan term.
9. Choose the right home loan
With so many products available, it is hard to know which really suits your needs. This is where a good finance broker can help you shortlist the products for you to make an informed choice.
10. Don’t pay interest on credit cards
We suggest that you pay off your credit card each month to save interest. Keep your limit to what you really require and not what your lender is prepared to offer you. Some lenders will set up an automatic sweep of your credit card if you prefer which means that your card is paid off each month from an account you nominate. This can work very well with an offset account.
What if my home loan won't let me pay it off faster?
If you currently have a home loan that isn't flexible enough to pay it off faster, then you should look at switching to one that does.
Disclaimer: This advice is general and does not take into account your objectives, financial situation or needs. Before applying for any products mentioned, please read the product terms and conditions and consider whether that product is right for you.