July 19, 2015
1. Pay it off quickly
Time is money. Pay your loan off as fast as you can. For example, if you take out a loan of $300,000 at 4.99% per cent for 30 years, your repayment will be about $1,609. This equates to a total repayment of $579,107 over the term of your loan. That's $279,107 in total interest.
If you pay the loan out over 20 years rather than 30, your monthly payment will be $1,978 a month. The total amount you will repay over the term of the loan will be only $474,770 - saving you a total of $104,337.
2. Make more Frequent Payments
One of the simplest and best strategies for reducing the term and cost of your loan is to make your repayment on a fortnightly rather than monthly basis.
Split your monthly payment in two and pay every fortnight, it could make thousands of dollars and years difference over the term of your loan.
The reason for this is that there are 26 fortnights in a year, but only 12 months. Paying fortnightly means that you will be effectively making 13 monthly payments every year.
Using the inital example from above; the total repayment was $579,107 over the term of your loan, $279,107 in total interest. By paying fortnightly, the total repayment would be $527,816, thats a $51,290 saving and the loan term is reduced by 4 years and 9 months.
3. Consolidate your Debts
One of the best ways of ensuring you continue to pay off your loan quickly is to consolidate debts such as credit cards and personal loans into your home loan. As rates start to rise, your personal loan rate will rise and so will your credit card rate.
This is not a good thing as the interest rates on your credit cards and personal loans are much higher than the interest rate on your home loan. Many lenders will allow you to consolidate - re-finance - all of your debt under the umbrella of your home loan. This means that instead of paying 15 to 20 per cent on your credit card or personal loan, you can transfer these debts to your home loan and pay it off at 5.00%
4. Forgo those Minor Luxuries
Giving up your favourite indulgent snack, taking your lunch from home and save on take away coffee.
Consider the following example. A typical day may include luxuries that will set you back $15 a day or $75 a week or $325 a month or $3,900 a year.
Using the inital example from above; the total repayment was $579,107 over the term of your loan, $279,107 in total interest. By paying making additional repayments of $325 a month, the total loan repayment would be $482,782. Forgoing minor luxuries could save you $96,325 in interest and and repay your loan 9 years and 2 months earlier.
5. Switch to a Lender with a Lower Rate
It may sound like a simple idea but switching out of your current loan and taking out a loan at a lower rate can mean the difference of years and thousands of dollars. You may be able to find that you could get a no frills rate that is as much as a percentage point cheaper than your current loan.