Home Loans

How to repay your home loan quicker?

 

We often get asked by our clients, how they can repay their home loans quicker.

The key is how effectively you manage your repayments.  We have listed top 6 tips on saving interest on your home loan and repaying your loan quicker.

 

1. Change monthly to fortnightly repayments.

By repaying your home loan on fortnightly or a weekly basis you will be making the equivalent of an extra monthly repayment each year, this will help you repay your home loan sooner and also save you interest.

Example: A 30 Year $500k loan @ 5% interest rate can be repaid 4 Years and 9 months earlier saving you over $85k in interest just by paying every two weeks.

 

2. Extra Repayments

If you earn more and spend less why not put it towards your home loan?  An extra $100 repayment per fortnight on your loan from the above example will reduce the loan term by 4 years and 16 fortnights saving $82k in interest over the term of the loan.

 

3. Cut back on some luxuries

Bring coffee and lunch to work rather than eating out.  $15 a working day ($3 Coffee + $12 Lunch) saved and paid towards the loan will save you $113k in interest over the term of the loan in the above example.  Make that saving twice if you are a couple.

 

4. Use unexpected money

Monetary gifts from friends and relatives, tax refunds or any unexpected payment like annual bonuses if channelled into your mortgage will always put you ahead in mortgage repayments.  These extra lump sum repayments will be a lifeline in times of job loss, extended sickness, career break or birth of a child.

 

5. Maintain your current repayments when interest rates go down

Okay if you find making extra repayments difficult then maintaining your current repayments can also be beneficial in reducing your loan term.  That is maintaining repayments when the interest rates go down.  Not taking the option of reduced repayment when interest rates go down will actually benefit you in the long run while not affecting your budget.

From the above example of the 30 Year $500k loan at 5%, your minimum monthly principal & interest instalment would be $2,684.11

Now if the interest rate was to drop by 1% then your monthly repayment will reduce to $2,387.08 which is a saving of $106,931 over the loan term.  But if you continue to pay $2,684.11 instead of the lower repayment, then you would save a massive $183,856 over the loan term.

 

6. Refinance your home loan

This refers to taking out a cheaper and better home loan to pay your initial loan. The new loan will mostly offer lower interest rate and can be tailored to suit your own circumstances.  i.e change from interest only to principal and interest repayments, fixed rate to variable rate etc.  Due to increased competition now, switching variable home loans is quite simple and usually doesn’t cost more than a few hundred dollars.

Some lenders even pay cash rebates upto $1500 after settlement of the new loan.  Low-interest rates enable you to pay less in interest and more to cover the principal without changing the amount of money you pay monthly. This will help you clear your loan faster.  Our helpful home loan advisors will help you find the best loan suited to your circumstances and show you how quickly you could repay your existing debt by switching.

 

 Exceptions

  • Fixed rate loans:There is a limit of extra repayments on fixed loans without paying additional fees, generally $10k annually.  You may check with your bank about making additional repayments without paying a penalty and organise your repayments accordingly.

If your fixed loan is set up with a variable portion, then you can make unlimited additional repayments on that part of the loan.

However if your fixed term is coming to an end and you are not sure what other options are there in the market to repay your loan quicker, just call us.

  • Investors: Investors usually like paying off their non-tax deductible debt such as owner occupied home loan, car loan or credit card and save any additional money from their income to re-invest.  This strategy helps them reduce expense at the same time maximise tax benefit and save more for investing in their next income producing asset / venture.

If you do not have any other debt except the investment loan, then making additional repayments into your offset account may be beneficial.  If you do not have an offset account with your investment loan and need specific advice on your loan, contact us.

  • Interest only loans: If you are an owner occupier on an interest only loan, wanting to repay quicker, then you should consider changing to principal & interest loan.

To find out whether your loan is interest only, simply check your statement to see if your balance is reducing each month.  Call us to find out best available options.

 

Disclaimer

This is general advice about saving money on your home loan not specific financial advice.  Please refer to your financial planner to discuss your specific financial goals.  If you have a question about your home loan, please feel free to call us on 02 8321 8895 or enquire online.

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