Did you know that the faster you pay off your home loan, the less money you will have to pay in interest? By putting some proactive strategies in place to get your home loan paid down sooner, you could really save yourself some money! If you’re keen to make some serious headway on your mortgage debt, here’s a few tips that could help you get ahead.
Pay fortnightly instead of monthly
One of the easiest ways to pay down your mortgage faster is to make your home loan repayments fortnightly instead of monthly. If you get paid fortnightly, you’ll find this is an easy and convenient way to make your repayments – and there’s no need to pay more money to make a big difference. Just by splitting your mortgage payment in two and paying more often, you could cut years off your loan term and save a lot of money in interest.
How does this work? There are 26 fortnights in a year, but only 12 months. By paying fortnightly, you will be effectively making the same as 13 monthly repayments every year – paying more without making an impact on your budget. Over a 30 year loan, this could shave up to 4 years off your loan term and also save you some interest over the life of the loan.
Make bigger repayments
In the first few years of your loan, most of your repayments will go toward paying the interest rather than paying down the loan itself. This is just a quirk of the way compound interest works, but by making bigger repayments, you’ll be paying more off the loan itself and thereby reducing the amount of interest you have to pay. Over time, this can help to significantly shorten your loan term and save you even more money.
It might be a good idea to make your loan repayments at two or three percentage points above your interest rate. This will not only help you pay off your loan sooner, if you’re already paying at the higher level, you won’t be in for a shock if interest rates should rise in the future.
If your budget won’t allow you to repay at a higher interest rate, consider what you can actually afford to add to your repayments. If you can only afford an extra $100 a month, then go ahead with that for now. Every little bit helps and you can always increase your repayments when your circumstances improve.
Make the most of low interest rates
Our interest rates are currently at all-time lows and lenders are offering some very competitive rates and home loan packages. If you’ve had your home loan for a while, talk to us about the possibility of re-financing to get a lower rate. If your circumstances have improved since you first took out your home loan, this could also help you get a better rate.
Many experts are predicting that interest rates will fall even lower in the foreseeable future. If this happens, it’s a good idea to continue paying at the higher rate even if your interest rate falls. Again, this is a strategy for attacking the principal of your mortgage, which saves you money on interest and can significantly reduce your loan term.
Use any lump sums to pay off your mortgage
We all get little windfalls from time to time, but instead of squandering them on stuff you don’t need, consider the advantages of paying them off your home loan! Not all loan products will allow you to make extra payments, so talk to us to find out if that’s an option on your particular loan.
Any extra payments you make on your mortgage reduces the loan principal and that means you’ll have to pay interest on a smaller amount. So if you get a tax return, cash birthday present, or sell that second car, if it’s possible to do it, then whack the money down on your mortgage to give yourself the best gift of all.
Consider using a mortgage offset account
Many variable rate home loans can be organised with a mortgage offset account as a benefit. Using an account like this could help you put any extra cash to work on your home loan – even if you don’t want to use it to pay off the home loan itself.
A mortgage offset account is simply a savings or transaction account that is linked to your home loan. The more money you have in your offset account, the less interest you have to pay on your home loan. For example, if you have a $300,000 home loan and keep $10,000 in your offset account, you only pay interest on $290,000.
This is often considered a good way to put the interest from your savings to work for you. If you kept your savings in a regular savings account, you would have to pay tax on the interest it earned. By putting that money into a mortgage offset account instead, you can save on tax and pay down your home loan sooner.
Don’t have a lump sum of money right now? You could be saving yourself money on interest simply by having your salary paid into your mortgage offset account. Because you can use it like a regular transaction account, it won’t affect your budget. By doing this, you may only be saving a small amount of interest each month, but over time it can make a big difference.
Remember, your home loan is one of the biggest financial commitments you’ll ever make. It is important that you continue to manage your mortgage over the life of your loan – just set and forget for the next 30 years is no way to get ahead! It’s a good idea to talk to us regularly to ensure your loan product remains the very best one for your needs and personal circumstances.
If you’d like to talk about your repayment strategies, or if you think it’s time for a home loan health check, then please don’t hesitate to give us a call. We’re here to help you make the most of your finances and reach your financial goals sooner.