It’s one thing to say that you’d like to pay off your home loan faster, and it’s another to take action. For most of us, the former is more our reality. We all want the dream of owning our home outright and saving money as we do it, but unfortunately, life takes over. There is usually never enough time in the day, or we get complacent, we start to run on autopilot and we put strategies we know are good for us in the too-hard basket to be looked at another day, or in some cases, not at all. The good news is, there are some simple things you can do to help shave years off your loan term and reduce the amount of interest you pay to your lender, all of which can be made easier with our help.
1. Consider fortnightly payments instead of monthly
One of the simplest and best strategies for reducing the term of you loan, as well as the costs and potentially your exposure to rising interest rates, is to make your regular repayments on a fortnightly basis rather than a monthly one. For those who get paid fortnightly, align your mortgage repayments with your income payment period.
By switching to fortnightly repayments means you’ll end up making the equivalent of 13 months’ worth of repayments instead of 12 in a year, an extra month’s payment each year will go a long way in helping you own your home sooner.
2. Make extra repayments where possible
Making extra payments on your mortgage can cut your loan by years. For every dollar you commit to your loan, over and above your regular repayment each month, goes completely towards paying down the capital/principal portion of your loan. This can significantly reduce the life of the loan as well as the amount of interest you pay over that loan term.
With a loan value of $500,000, taken over 25 years, contributing even an extra $500 each month, on top of your regular repayments, could reduce your loan term by around 5 years, not to mention, potentially save you approx. $50,000 in interest repayments (source: www.canstar.com.au).
3. Shop around for a lower interest rate
An obvious choice, by an effective one nevertheless.
Find a loan that not only has the right features for you but also offers a lower interest rate. But first, understand what features of your current loan you want to keep, then, compare those features with similar loans that offer a lower interest rate. If you can find a better rate elsewhere, first ask your current bank if they can match it, it’ll save you money but also the time and effort to move lenders, if not, then consider moving.
It may sound like a simple idea but switching out of your current arrangement and taking out a loan at a lower rate can mean the difference of years as well as thousands of dollars in savings. Before you make any move, consider if there are any exit fees on your current loan and/or establishment fees on the new loan which could prevent you from moving.
4. Continue making higher repayments in a falling interest rate market
A good way to get on top of your mortgage is to pay it off as if you were on a higher interest rate or, if you refinance to a lower rate, continue to make your repayments at the same level you were paying prior to the rate reduction. For those of you in autopilot, or working on a budget, this one is a good strategy, nothing changes with your outgoings but in the background your money is working harder for you, paying down more of your mortgage and reducing the life of the loan without having to think too much about it.
5. Take advantage of using an Offset Account
Whilst an off-set account isn’t usually available or practical during a fixed rate term, it can do wonders for those with a variable rate loan, or the variable rate component of a split loan.
Instead of earning interest, having an offset account linked to your mortgage reduces (or offsets) the amount of interest you pay on your mortgage (it won’t always be a 100% offset but any little but will help); the more you have in your offset account, the more you end up savings in interest payable to the lender. With the savings you can contribute more to the principal of your loan, potentially shortening the life of the loan. One way to make the most of this facility and reap the benefits, is to have your salary or other sources of income paid directly into your offset account.
To learn more about the advantages of an offset account, go to our Our Thoughts page or click here.
6. Where possible avoid interest-only terms
This might make sense for investment properties given the potential tax benefits, but even then, it can be a gamble especially if the property value doesn’t rise. As for your principal place of residence, this strategy does nothing to reduce the loan term or associated costs over the term, it just does not make sense.
Interest only terms usually come with a higher interest rate compared to a principal and interest loan, so you may end up paying more in interest over the life of the loan. An interest only term also means nothing is paid towards your principal, therefore, unless the value of your property rises, you’ll have no equity built up in your home, which could pose significant problems if there is a market downturn and you need to sell quickly or you need access to funds in the short term.
7. Direct all your income to an Offset Account
To compliment the benefits of an offset account, directing your salary and income to an offset account means you can save on interest over the life of the loan, and as we know, any savings can then be directed straight to the principal consequently paying down the mortgage sooner.
Although the interest you pay is debited each month (or fortnight), it is calculated on a daily basis, so leaving your salary untouched even for a few days or staggering your living expenses over a few days instead of all in one day could save you (in some cases) hundreds of dollars in interest costs each month.
8. Focus on your principal at the early stages of the loan
It’s a known fact, in the early years of any home loan, you end up contributing most of your regular repayments towards interest and less towards the principal. It may require you to combine some of the other points mentioned in this article to achieve this (i.e. make extra payments, give up on some of the luxuries, etc), but develop a strategy to attack your principal in the early stages of your loan, this will make a significant difference to your loan term and cost savings down the line.
9. Consider consolidating your debts
One of the best ways to ensure you continue to stay on top of your loan repayments and protect yourself against interest rate rises, is to consolidate your high interest debt with your low rate mortgage. Whilst this strategy can help improve your debt management, more importantly, it can allow you to use the savings to help pay down you mortgage sooner. However, where this strategy doesn’t work, is moving around the debt to only build it back up again (i.e. credit cards). You’ll need to consider a budget, or even cancellation of your credit cards to make the debt consolidation strategy a viable solution.
Debt consolidation can also help improve your credit score – having one loan to service would reduce the potential of late payments or missed payments trying to service multiple loans.
10. Give up some of life’s small luxuries
Every little bit helps.
Whether you buy 2-3 coffees a day, smoke a packet of cigarette’s a week, buy lunch or eat out regularly, or even subscribe to the multitude of different streaming services, think whether you could cut back on some or all of these luxuries.
For example, a $4 coffee, purchased twice a day is $8 per day, $40 a week, $160 per month, $2,080 per year. Subscriptions to Netflix, Stan, Spotify, Heyu, etc might total $50 per month, that’s $600 per year. Redirecting these funds to your home loan can shave years off your loan term and reduce you interest payable during that time.
11. Are you a doctor, lawyer or accountant? You may be eligible for a professional package loan, packed full of discounts.
Some lenders offer discounts in the form of reduced interest rates, waived or reduced LMI, waiving of some fees, etc to specific professional groups (i.e. mainly those mentioned above) or members of professional organisations. Ask you lender if your occupation qualifies, and if you do but you don’t meet the eligibility criteria is there anything you can do to change that, asking the right questions and making the necessary changes could save you money in the long run.
If you’d like to know more or, if we can help you find the right lending solution for your needs, please contact us, we’d love to hear from you.