August 15, 2016
Three simple steps could see you squeeze more from every dollar to pay off your home sooner.
Clear your home loan faster with three simple hacks and enjoy long term financial freedom.
Step 1 Regain control of your income
When it comes to having complete control of your money, following a household budget is a critical starting point.
With a budget in place you have a clear idea of how much money is coming in, where it’s being spent, and how you can cut back to free up cash for extra loan repayments.
If you’re not following a budget, you’re leaving your finances to chance. It’s that simple.
Step 2. Rethink your home loan repayments
Making additional repayments on your home loan is a proven way to pay off your loan sooner. Every extra dollar paid on your loan comes straight off the loan balance. This means the next month’s interest charge is lower, and more of that month’s repayment will also come straight off the principal. It’s a simple way to swing the loan pendulum in your favour.
If your budget is tight and there’s no scope to pay more off your loan, it can help to rethink the timing of loan payments.
The interest charge on virtually all home loans is calculated daily, so making loan repayments more frequently can see you save on interest charges. Dividing your monthly repayments by four and paying each installment weekly for instance, can make each dollar work harder by helping you pay down the loan sooner. But speak to your Mortgage Choice broker first. The benefits of this approach can depend on how your lender calculates “weekly” payments.
Let’s say for example, your monthly loan repayments are $1,000 – or $12,000 in a single year. On this basis, some lenders will calculate the weekly payment at $250 ($1,000 a month divided by four weeks). As there are 52 weeks in a year, your loan repayments will total $13,000 over a 12-month period, meaning you have made an extra month’s loan repayment without too much impact on your budget.
However some lenders calculate weekly payments differently – such as the total annual repayment divided by 52 weeks. Using the above example, this would make the weekly payment $230 ($12,000 divided by 52 weeks), so paying off your loan weekly won’t necessarily put you in front.
The key point is to speak with your local Mortgage Choice home loan expert to know which method applies to your loan. Though bear in mind, additional repayments at any stage of the month will help to pay off the loan sooner.
Step 3 Embrace the offerings of offset
An offset account is an everyday account linked to your home loan. Instead of being separate interest on the linked account, the value of the offset account is deducted from (or ‘offset’ against) the value of your home loan when monthly interest is calculated.
For instance, if you have $20,000 in the linked account, and your loan is worth $500,000, interest will be based on a balance of $480,000.
In this way, an offset account offers the savings of additional repayments while still giving you access to your money at call.
If you can’t decide between extra repayments or using an offset account, consider this. Most variable rate home loans provide redraw – the ability to withdraw extra payments. The drawback is that you may face restrictions about how often the facility can be used and how much cash can be withdrawn each time. Fees may also apply to each redraw.
By contrast, the cash held in an offset account is normally accessible through an ATM, so if you plan to dip into the funds frequently, an offset account may be a better option.
To understand how to make your money work hard paying off your home loan, speak with your Mortgage Choice broker. The tailored advice you receive could be the key to making every dollar count.