To suggest that there are just 15 ways to pay your home loan off sooner is a little deceiving because there’s countless factors that can reduce your monthly obligations, and reduce the term of your loan. However, we’ll look at just 15 basic considerations.
1. Skip the honeymoon period
Beware of lenders bearing gifts. The idea behind these products is that an ‘irresistible’ offer is offered early on in the life of a loan, but will revert to a standard, or higher-than-standard variable rate. You may also be hit with a significant exit fee should you try and take advantage of the discounted rate for only a short time.
2. Make payments at a higher rate (extra payments)
A healthy habit is to assume a higher rate of interest for your home loan. So, if you’re paying 4% – assume it’s at 5% and make repayments on that new schedule. This way, if rates increase you won’t notice the difference. Additionally, you’ll literally shave years off your loan and save thousands in interest if rates stay the same.
3. Pay the loan off quickly
Whatever strategy is employed to pay your loan off as quickly as possible, it all comes down to putting in as much money into your home loan account as possible. Since interest is calculated daily, additional funds in your account contributes towards paying off your loan sooner.
Interest is calculated daily on the remaining balance. The lower the outstanding balance, the more you will save. For example, if you take out a loan of $400,000 at 5.00 per cent for 25 years, your repayment will be about $2,338. This equates to a total repayment of $701,508 over the term of your loan. If you pay the loan out over 10 years rather than 25, your monthly payment will be $4,242 a month. But the total amount you will repay over the term of the loan will be only $509,114 – saving you a massive $192,394.
4. Clever use of your credit card (using an offset account)
Many credit cards have an interest-free period (normally 55 days), meaning that you can buy now and pay for those goods in 55 days. This means that despite a purchase, your cash stays in your account and is used for daily interest calculations.
Clever use of an offset account means that it’s possible to pay a 25-year loan off in less than half the time.
5. Frequent payments
Paying your home loan off fortnightly rather than monthly can save you thousands. There are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year. Because you’re paying more frequently – and payments are calculated daily – you’re paying a lower amount of interest every day.
6. Get a package
Speak to your broker about the financial packages banks may have on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser, or even a fee-free transaction account. Every little saving translates into big savings over time.
7. Debt consolidation
Many lenders will allow you to consolidate all of your debt under the umbrella of your home loan. This means that instead of paying higher interest rates on your credit card and/or personal loan, you can transfer these debts to your home loan and pay it off at a far lower rate. Talk to your broker about how debt consolidation is best managed.
8. Split your loan
A good compromise is a split loan, which allows you to take part of your loan as fixed and part as variable. This allows you to hedge your bets as to whether interest rates are going to rise and by how much. If rates rise you have the security of knowing part of your loan is safely fixed. If they don’t, you can use the flexibility of the variable portion and pay that part off more quickly.
9. Forgo the luxuries
It’s easy to spend money on minor ‘luxuries’ such as coffee, alcohol, fancy lunches, and other discretionary items. Before you know it you’ve spent $10,000 a year. We’re not suggesting you live a life void of enjoyment, but it may be worth making cost-effective changes that will shave years off your home loan.
10. Vigilance
Don’t let the tail wag the dog. Working with us means that we’ll constantly monitor your product for rate and other changes, we’ll routinely contact the bank on your behalf to negotiate a better rate, and we’ll often assess circumstances to determine if another product might offer more significant savings.
11. The offset account
The offset account is a powerful weapon to attack your home loan. Instead of earning interest, any money you have in your offset account works to offset the interest you are paying on your home loan. For example, a mortgage of $300,000 at 5.00 percent with an offset account holding $50,000 means only $250,000 of your loan is accruing interest at the full rate. The best sort of offset account pays the same rate as your loan (100 per cent offset).
12. Pay first payment before due date
With most new loans, the first instalment may not become due for a month after settlement. If you can manage it, pay the first instalment on the settlement date. If you do this, you will be one step ahead of the lender for the term of your loan.
13. Make sure your loan is portable
If there is any chance that you will move house during the course of your loan, make sure that your lender will allow you to transfer your loan to a new property and that it won’t charge you the earth for the privilege.
14. Smaller lenders
It’s normal to be attracted towards big-brand primary lenders, but the loans they have on offer often come with a ‘premium’. Don’t be afraid to consider a loan with a smaller lender if their product offers suitable advantages. Your broker will discuss these issues with you.
15. Professional discounts
Many lenders will offer discounts to certain professions, such as doctors, lawyers, and dentists. Others might include Government jobs such as police officers and firefighters. Your broker will discuss these options with you should you qualify.