June 16, 2016
Making extra repayments on your home loan can be a clever financial strategy. Investing your extra cash into your home can speed up your loan’s life cycle, with the added benefit of saving money in the long run. However, care must be taken to ensure that extra repayments are planned and the right type of loan taken out to allow for them.
Every reduction in a loan’s principal balance reduces the interest paid for the life of the loan, meaning that extra repayments aren’t just a ‘pat yourself on the back’ moment. They are a way to save serious amounts of cash, and we’ve explained previously how extra repayments can cut a 30-year loan term in half and save hundreds of thousands of dollars. Most borrowers will, over the course of their careers, find themselves with higher earning potential as the years roll by. Having the option to pay more off your home loan as your cash flow increases offers a firmer grip on financial freedom, so it is important to consider what type of loan will suit you best if you intend to make extra repayments in the future, as not all loans offer this facility.
“Generally speaking, almost every basic variable or variable-rate product will allow extra repayments,” says Homeloans Ltd BDM Tom Wells.
You may be able to make extra repayments on a fixed-term loan, but there will usually be other restrictions involved.
“There are some fixed-rate loans that allow additional repayment,” says Wells. “The limitation there is that most fixed-rate loans don’t allow any redraw.”
It is advisable to ensure that extra repayments are built into your home loan structure if you plan on paying more than your monthly minimum, to ensure that you don’t get tripped up on break fees.
Wells suggests going through your future plans with your finance broker to make sure that all of your future goals regarding your loan are achievable under the product you end up taking.
“The best broker is going to ask the questions as to what the client-specific purposes for the loan are, what their needs are in regards to the loan,” Wells explains.
Choosing a home loan that will allow you to make extra repayments should be a decision made with your other liabilities in mind, too.
For instance, if one of your other debts is incurring higher interest, it makes more financial sense to pay that off sooner. You may also want to wipe off a separate debt completely to improve your cash flow.
These are important considerations, as choosing a variable rate home loan may end up costing you more if you don’t follow through with making extra repayments due to more pressing financial liabilities.
“At the end of the day, it’s the structure of the loan that is important to consider. You need to be able to facilitate your financial goals.”