Smart tips for paying off your home loan sooner
Wondering how to pay off your home loan sooner? We look at some things you could do.
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.
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 repayments calculator will quickly show what savings can be achieved.
Some lenders may charge you an early payment cost for paying your loan in advance. This is particularly the case with fixed-interest loans, so it’s always best to check up-front. These costs can be large.
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.
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. Wages and other income can be deposited into your offset account. 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.
Although obvious, many borrowers take out a mortgage and then stop following the home loan market. With interest rates constantly changing, it pays to monitor the latest rates. If rates go down, contact your lender or broker and ask if they can reduce the rate on your loan.
Don’t take the rate cut
When a lender reduces the interest rate on its home loans, usually in line with a cut in official interest rates, your first thought may be to reduce your loan repayments accordingly. However, by maintaining your loan repayments, you effectively repay more than the minimum loan repayment. If it’s possible to do so, this will help you cut the term of the loan and save on interest.
Pay both principal and interest
While you can make lower repayments by choosing an interest-only loan, doing so means the principal component of the loan will not be repaid while you are only paying interest.
Debt Recycling
You can use a “Master Limit” product to help you pay your home loan down faster while at the same time building wealth for retirement. For more information on how Debt Recycling works, check out the video below.
With just a few easy steps, borrowers can significantly reduce the length of their mortgage and save thousands of dollars in the process. First Choice Finance Group can assist you in setting everything up.
For more information on how you can pay off your home loan sooner, contact First Choice Finance Group on 1300 123 036 or visit www.firstchoicefinancegroup.com.au