There are many advantages to repaying your home loan quicker. Not only will you own your home sooner, you can avoid hefty interest payments and may be able to access built up equity to use as a security to upgrade your home or purchase an investment property.
By changing small details to your monthly spending, such as cutting back on taxi trips and take away food, or more prominent changes to your savings habits like making lump sum payments on your home loan, you can potentially cut the life of your loan and save thousands of dollars in interest owed.
When looking to pay off your loan sooner, one option might be to make more frequent repayments, for example making repayments on your loan fortnightly instead of monthly. There are 12 calendar months in a year and 26 fortnights, so if you were to repay fortnightly you would end up making the equivalent of 13 monthly repayments each year.
Following lenders passing on some of the recent interest rate cuts by the Reserve Bank of Australia, your home loan interest rate may have dropped. If you find this to be the case then it’s a good idea to continue repaying your loan at the pre-rate cut levels, to reduce the overall life of the loan and interest payable. On top of this, you might even like to round up your repayments to the nearest $50 or $100. For example, if you were to round up your monthly repayments from $1996 to $2100 (based on a $300,000 loan at 7% over 30 years) at the start of the loan term, you could shave off approximately 4 years and 4 months off the life of the loan and save over $71,500 in interest payable.
Making a lump sum payment (big or small) into your loan can also make a substantial difference to repaying the loan sooner. If a borrower who was one year into their loan term contributed $1000 from their 2012 tax return into the above mentioned loan, this would reduce the overall term by three months and the total repayments by approximately $6,509. Imagine the difference that doing this every year or with a higher amount would make!
Another option might be to establish a 100% off-set account. This would enable customers to link their savings account with their home loan account and off-set or use that amount to reduce the interest paid on their loan. Full offset of funds has the same result as depositing the funds directly into the loan account.
Or maybe you ought to consider switching your lender and/or loan? Perhaps you don’t use all of the features that are available on your loan, which can often mean that you are likely paying a higher interest rate then necessary. By refinancing to a more basic loan with less features, your repayments will be lower and you would potentially be able to afford to reduce your home loan even faster.
All in all, it really comes down to finding a repayment strategy that works for you and meets your individual needs. Those with an existing loan should give themselves a home loan health check every year or two. It may be that another loan offers a lower interest rate and/or fees. However, a more affordable loan may have fewer features, so carefully weigh up the emotional and financial pros and cons of all options. A qualified mortgage broker could help you determine if there is a more suitable loan available to suit your current financial and lifestyle needs.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"