Contributed by Melanie Tesoriero, Content Marketing Specialist at Aussie
Home loans typically come with a term of 25 or 30 years. But that doesn’t mean you have to chip away at your mortgage for this long.
These five simple strategies could help you get ahead on your mortgage and see you save thousands on interest charges in the process.
1. Check you’re paying a competitive rate
If your home loan is at the expensive end of the spectrum you could be behind the eight ball from the start.
In a hotly contested mortgage market, lenders are keen for your business, so you don’t have to put up with anything less than a competitively priced home loan.
The thing is, many lenders offer their best deals for new customers. So don’t be afraid to check out what’s available elsewhere, or be prepared to try and negotiate a better home loan rate with your current lender.
2. Pay a little extra off your home loan each month
Regularly paying a bit more off your loan is an easy way to pay off your home loan faster. And you don’t have to pay a lot extra to reap valuable rewards. Paying just a dollar a day more into your loan can help you own your home sooner.
On a home loan of $350,000 with a rate of 3.89% for instance, paying $1 a day extra off your loan can see you become mortgage-free up to eight months ahead of schedule, and cut the overall interest cost by as much as $5,500. Make it $2 a day extra to save $10,717 in total interest and cut 15 months from a 25-year loan term. A brilliant result for less than the price of a daily cappuccino!
Canstar’s mortgage calculator can show you how extra repayments can help pay off your loan sooner.
3. Make lump sum payments into your home loan
Do you receive an unbudgeted lump sum of cash each year, like a tax refund or work bonus? These windfalls are a handy source of cash that can help you pay off your home loan sooner.
It’s money you’ve learned to live without to this point, and chances are you’ll never miss what you’ve never had. Better still, using a windfall to make a lump sum payment on your home loan can dramatically accelerate a loan reduction because the money comes straight off the loan balance.
On the same $350,000 home loan mentioned earlier, using a $2,000 tax refund to make a lump sum repayment on your loan can cut up to three months from the loan term and see you save over $3,000 in interest. It’s a great way to get more bang for your buck.
Make it an annual habit to pay lump sums into your loan to supersize the interest savings.
4. Make your loan repayments fortnightly
If making extra repayments isn’t an option, try paying more frequently.
Rather than making repayments monthly, aim to pay half your regular repayment each fortnight. Over the course of a year, you’ll make 26 repayments. That’s equal to 13 regular monthly payments, instead of the 12 monthly repayments your lender will ask for. So you’ll make one month’s extra repayment each year without too much impact on your hip pocket.
Do note, the success of this strategy can depend on how your lender treats monthly versus weekly repayments.
5. Consider a home loan offset account
A home loan offset account is basically a savings or transaction account attached to your home loan. Instead of being paid separate (and fully taxable) interest on your savings, the value of any cash in the offset account is deducted from your home loan balance with interest calculated on the difference.
As a guide, if you have a home loan of $400,000 and savings of $20,000 in the offset account, interest will be based on a loan of $380,000. This reduces the monthly interest cost but as your regular repayments stay the same, more of each payment goes towards paying down the loan principal.
Offset accounts are a tax-friendly way to use savings as you’ll save more on home loan interest than you’re likely to earn on a separate savings account. Your spare cash is at call so a home loan offset can be more convenient than redraw, though it can take some discipline to avoid dipping into the linked account.
The bottom line is there’s a lot to love about paying off your home loan sooner. It could put a lot more cash in your pocket eventually and mean less worries about rate hikes. Best of all, you’ll own your place outright without a lender to answer to, and there’s no better feeling.
About Melanie Tesoriero
Melanie is the Content Marketing Specialist at Aussie. A lover of the outdoors, she’s spent a lot of time abroad, trying to satisfy her never-ending case of wanderlust. Satisfied with exploring her own backyard for the moment, Melanie enjoys weekend adventures around Australia. You won’t find her far from her mobile unless she’s at the gym or sleeping.