Small changes now can mean big differences later to how much of your home loan you end up repaying – and how long it takes.
If you’ve recently had a home loan approved or are already some way into your repayments, you may be thinking about how you can pay it off sooner rather than later. We explore some smart ways to shave interest – and years – off your mortgage.
But before we start, we’re going to assume that you’ll make your repayments on time. In the assumptions below we’re also not allowing for interest rate movements. Basically though, if rates go down – you’ll speed up paying off your loan if you keep your repayments the same. If rates go up – you’ll need to increase your repayments accordingly.
Increase your regular repayment amount
Paying more than your required repayment amount is the easiest way to reach your home ownership goal sooner.
John and Mary decide to contribute an additional $385 per month on top of their $2,315 monthly home loan repayment, paying $2,700 each month. Over the course of 12 months they pay $32,400, which is roughly equivalent to two additional months’ worth of payments each year.
This will shave approximately six years off their 25-year loan term as well as around $80,000 in interest.
- Original home loan repayment: $27,780/yr x 25 years (@ 4.9% p.a.) = $694,500
- Revised home loan repayment: $32,400/yr x 19 years (@ 4.9% p.a.) = $614,948*
* Source: ASIC MoneySmart mortgage calculator.
With interest rates at all-time lows many people have the opportunity to make extra repayments on their home loan. Add in a home loan refinance to potentially score a lower rate and you’re well in front.
Refinancing your home loan
Basically, the lower your rate – the faster you can pay off your home loan – if you keep your repayments at higher levels.
A home loan refinance to a lower rate can help you. Be mindful of fees and make sure you don’t end up including in unnecessary costs like annual fees – just to get a lower rate. That may take away any potential benefits.
For example, if your mortgage is $600,000 and you can reduce your interest rate by 0.25% pa, with no additional ongoing fees added in, that saves you approximately $1,500 in interest costs for the first year. If you maintain the same repayments from your previous loan, you’re paying in advance and paying your home loan off sooner!
It pays to get advice and let a lending specialist do some research for you. The home loan refinance process these days is fast – and very simple.
Related post: 4 smart home loan refinancing strategies
Make additional lump sum payments
Making additional lump sum payments – especially during the early years of your home loan – can have a profound effect on how much your total home loan repayments will be and the length of time to own your property outright.
Jane’s required monthly repayment amount is $2,485 on a $400,000 loan with a loan term of 25 years. Over the term of the loan she’ll pay a total of $29,820 in one year ($2,485 x 12), and over 25 years, Jane will pay $745,500.
Five years into the loan, Jane receives an inheritance of $70,000. Dividing the money, she puts $40,000 into her home loan and $30,000 into her bank account.
Making the lump sum repayment of $40,000 means that instead of paying off her loan after 25 years, she will reduce the loan term by more than three years – assuming her repayments remain the same – and save herself more than $70,000 in interest. The redraw balance will also gradually reduce in line with the loan term.
Set up a mortgage off-set account
A mortgage off-set account allows you to offset, or reduce, the interest charged on your home loan by letting you pay down the principal loan amount with your savings.
Say you have a home loan balance of $400,000, and you put $20,000 into an offset account. By doing this, you’ll only need to pay interest on a balance of $380,000 ($400,000 – $20,000) rather than $400,000.
The more money you have in an offset account, up to the balance of the loan, the bigger the savings and the faster your loan can be paid off.
So at the moment with very low interest rates being paid on bank deposits, if you have savings now may be the time to set up an off-set home loan.
Want to find out more or crunch some numbers?
Our local lending specialists have access to a wide range of product options (including off-set loans with no annual fees) that may assist you including refinance packages, debt consolidation options, high LVR loans, and tailored solutions for self-employed people.
Taking steps to pay off your home loan sooner can start with a simple phone or web based chat.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.