Australians love the idea of owning their home, but having to deal with a hefty mortgage for the next 20-30 years can be daunting.
It’s easy to forget, however, that the quicker the loan is paid off, the less there will be to pay. By speeding up the payment process, you can save yourself thousands of dollars in interest and months of repayments! Here are some strategies to help you pay off your home loan quickly:
1. Make small extra repayments
Even a little bit of extra money added on to regular home loan repayments can wipe years off your home loan and save a lot of money. For example, borrowers paying an extra $80 a month off a 30-year $200,000 loan with an interest rate of 6.94% can save themselves $52,630 in interest and cut 4 years and 10 months off their loan.
2. Make more frequent repayments
Simply by paying off your loan weekly or fortnightly instead of monthly you could find yourself well ahead. For instance, if you change from monthly repayments to fortnightly repayments, you will actually be making one additional repayment a year and hardly even noticing it (because there are 26 fortnights in a year compared to 12 months). However for this to be effective it is important that you ask your lender to halve the monthly repayments when calculating the fortnightly repayments, rather than recalculating the amounts.
3. Make additional lump sum repayments
If you suddenly come into some extra money such as an inheritance, a bonus at work or a good tax return, then the wisest course of action is often to put it towards your mortgage. The resultant savings can be huge.
4. Salary crediting
Salary crediting means having salary deposited directly into your loan account each month. You can then use a credit card with a good interest-free period to pay for your regular living expenses and at the end of the month have the card ‘swiped’ (or paid off) against the home loan. Because interest on the home loan is calculated daily, every day you leave extra money in your home loan account is of direct benefit to your hip pocket.
5. Take advantage of interest rate cuts
If interest rates fall, don’t be in a hurry to reduce regular repayments. Ask your lender to leave them at the previous level and you’ll find that a relatively small cash advantage turns into a windfall in interest savings. In the process, you’ll also be putting a buffer in place in case interest rates rise in the future.
6. Get to know your loan
It pays for borrowers to get to know their loans and to make the most of the features and benefits they offer. For example, many variable loans offer salary crediting, a free redraw facility and the flexibility to switch some (or all) of your loan from a variable to a fixed rate, whenever you wish. Sometimes circumstances can change and particular loan features can become very useful and even save you money.
7. Make repaying your home loan a priority
Interest repayments on an owner-occupied home loan are not tax-deductible, which means it makes good sense to give priority to paying off your home loan quickly instead of directing funds towards paying off investment loans or having them sit in low interest-bearing deposit accounts (where any interest received will also be taxed).
Try your best to also resist the temptation to redraw money from your home loan to fund consumer items, holidays, or the like. The bottom line is that the people who are the most successful in paying off their home loans quickly are those who make it a priority.
