Blog

February 25, 2018

Want to pay off your home loan sooner?

Tim Cece | Director, Search Mortgages

It’s everyone’s dream – to pay off your home loan quicker.  And with home loan interest rates at all-time lows the opportunity to pay off a mortgage quicker has never been better. Here are some mortgage saving tips that can speed up loan repayments and reduce your home loan balance.

Increase your repayments
The simplest way to quickly reduce your home loan is to increase your mortgage repayments. Simply by repaying more than the minimum each month you will reduce your overall term of the loan and this can save you thousands of dollars in interest.

Example:
Bob & Sue’s have 26 years to run on a 300,000 home loan. Their current repayments are $1,550 a month@ 4% p.a. If they increased their repayments per month to $1,710 (an extra $160 a month (less than $40 a week)) they would pay off their loan 4 years earlier and save $31,000.

Make repayments fortnightly
Most home loans are set up to be paid monthly, but what if you decided to pay half your monthly repayment fortnightly instead?  By using this system you would make the equivalent of an extra month of payments by the end of the year.

Example:
Bob & Sue’s have 26 years to run on a 300,000 home loan. Their current repayments are $1,550 a month@ 4% p.a. If they instead paid $775 per fortnight they would pay off their loan 3.5 years earlier and save over $26,000.

Make Extra lump sum payments
Rather than spending or saving that bonus or tax refund – instead using it to pay off your home loan can be a great way to reduce your mortgage.  The earlier this is done in the life of the loan the more that can be saved.

Example:
Bob & Sue’s have 26 years to run on a 300,000 home loan. Their current repayments @ 4% are $1,550 a month. They both get yearly bonuses of $2000 and they decide to put half this money into their home loan.  By putting in the extra $2000 per year they would pay off their loan 4 years earlier and save $32,000.

Use an offset or redraw account
Offset accounts allow you to pay down the principal loan amount by using your savings. By depositing wages and other income into your offset account (which is easily re-accessible) your loan amount is decreased. The more money you have in an offset account, the bigger the savings and the quicker you can pay off your loan.

Redraw accounts simply allow you to put extra savings into your mortgage and then have the ability to withdraw the same amount when you need it.

Don’t take the rate cut
When a lender reduces the interest rate in line with an official interest rates cut, your first thought might be “woo hoo, less to pay on my home loan”. However, by leaving your loan repayments the same, you are in fact repaying more than the minimum loan repayment, hence paying off your loan quicker.

Seek out lower rates
Statistics say that many Australians take out a home loan and do not do regular Loan Health Checks.  At Search Mortgages we encourage clients to regularly challenge us or their lenders to find them a better rate. Lenders are constantly in competition with each other and it’s easier (and cheaper) for them to retain a client (by reducing rates) than trying to entice a new client to join.

Split loans (both variable and fixed terms)
A split loan enables you to split your mortgage so that you can have the advantage of both variable and fixed terms. The rates are generally lower and are particularly effective if you are not sure what interest rates may do in the future.  By making extra repayments to the variable or fixed components, (to pay that component off quicker) depending on which has the higher rate, you can save but also beat the banks at their own interest rates game.

Use your home equity
As the value of your home rises, so does the amount of equity in your property. This means you will have more money available to borrow.  By using this equity to make major purchases (renovations, buying cars, going on that once in a life time holiday …) the cost of these funds are much cheaper than credit card, personal loan and car loan costs.

By making a plan and sticking with it you can take years off your home loan.