Why pay down your home loan faster
You might wish to boost your repayments now, so that you can enjoy the freedom of being mortgage-free. This could help bring forward the overseas holiday you’ve been promising yourself, or help your children complete their education.
Perhaps you’re planning onrenovating your hometo add value to your property or you’re interested in purchasing an investment property orinvesting in shares, opens in new window.
Here are some ideas that could help get you there sooner.
1. Open an offset account
A mortgage offset account is a savings or transaction account linked to yourhome loan.
It can help you pay less interest because, every day, the money in your offset account is offset from the outstanding balance of your home loan before the interest is calculated.
To make the most of this, you could have your salary paid into your offset account and use a credit card to cover your day-to-day expenses. This is a low-cost way of keeping money in your offset account. Remember to pay your credit card bill in full, or if you have a balance transfer to pay the 'interest free days payment’ before the end of the interest-free period.
If you have an offset account or you're thinking about setting one up, check out our article on how to pay less interest on your home loan with an offset. You'll find some helpful tips and things to consider.
2. Make more frequent repayments
This isn’t always an easy task. But if you change your repayment cycle, you could end up making extra repayments. Why not consider changing your repayments (minimum or extra) to fortnightly. This way, you’ll end up paying more off your loan each year. How?
Say your monthly repayments are $2,000. By the end of the year, you’ll have repaid $24,000 (not accounting for interest). If you change this to $1,000 a fortnight, by the end of the year you’ll have repaid $26,000. This is because there are 12 months in a year—and 26 fortnights.
This extra amount comes directly off your loan principal and reduces the amount on which future interest will be calculated. As the interest is less, more of your repayment goes towards paying off the principal off your loan, so your mortgage gets paid off sooner.
3. Make extra repayments
If your home loan allows you to make extra repayments, it’s as simple as increasing the amount you pay each month. You may need to check with your banker.
A tax return, a work bonus, a birthday present, a sale on eBay – make a habit of ploughing every lump sum you receive into your mortgage.
4.Fixed versus variable rate loans
Both have their pros and cons. If you want to pay off your loan faster, you might opt for a variable rate over fixed. It's more flexible, letting you make unlimited extra repayments at no cost.
If you have a fixed-rate loan now, you’re not stuck with it forever. Once the fixed term ends, you can roll it over to variable and make extra repayments. Don’t forget, until your fixed rate term is up, you may be charged break fees to switch from fixed to variable.
Some borrowers split their loan between fixed and variable rates. If you make additional payments, you’ll need to consider if there are limits on how much extra you can pay on your fixed loan.
If the timing is right and you want to pay off more, you could consider shifting a portion of your loan to variable.
5. Look at ways to cut back
Be tough but realistic – your aim is to make changes that you can live with for at least the next five years.
Once you’ve calculated how much you can save, arrange to have that amount paid regularly and automatically into your mortgage account.
Cutting out just one cup of takeaway coffee every working day could save $1,000 a year. Always keep an eye out for new opportunities, including better deals on essentials such as gas and electricity.
6. Rent out a room
Enlist other people to help pay off your mortgage by renting out your spare room.
Accommodation websites such as airbnb.com.au can help with short-term lets or you might prefer a longer-term arrangement with a local or overseas student.
You might need permission from your local council and, if you’re living in an apartment, you must check the rules with the body corporate. If all goes well, you could meet some interesting people as you slash years off your home loan.
7.Reduce your payments as a last resort
When variable interest rates fall, some people like to reduce their repayments. It’s tempting, but think about keeping your repayments as they are. It'll mean you end up paying more off your loan sooner.
On the other hand, if rates keep steady for a while, think about adding an extra $20 dollars on top of your normal repayments. It really does add up.
If you’re thinking about applying for an interest-only loan structure to reduce your payments, do your research. Australian Securities and Investments Commission (ASIC) have some useful information for customers using an interest-only repayment period as part of their loan term. Check out their MoneySmart, opens in new windowguidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
