To suggest that there are just 14 ways to pay your home loan off sooner is a little deceiving because there’s countless factors that can reduce your monthly obligations, and reduce the term of your loan. However, we’ll look at just 15 basic considerations.
1. Skip the honeymoon period
Beware of lenders bearing gifts. The idea behind these products is that an ‘irresistible’ offer is offered early on in the life of a loan, but will revert to a standard, or higher-than-standard variable rate. You may also be hit with a significant exit fee should you try and take advantage of the discounted rate for only a short time. The honeymoon is discussed in our Variable Rate FAQ.
2. Make payments at a higher rate (extra payments)
A healthy habit is to assume a higher rate of interest for your home loan. So, if you’re paying 4% – assume it’s at 5% and make repayments on that new schedule. This way, if rates increase you won’t notice the difference. Additionally, you’ll literally shave years off your loan and save thousands in interest if rates stay the same. When or if rates do increase, see if you can also increase your monthly repayments. Read more about compound interest in our Education module.
3. Pay the loan off quickly
Whatever strategy is employed to pay your loan off as quickly as possible, it all comes down to putting in as much money into your home loan account as possible. Since interest is calculated daily, additional funds in your account contributes towards paying off your loan sooner.
Stop carrying cash; every dollar in your wallet could be working to minimise your home loan. Empty old money boxes and coin trays in your car. Ensure you consolidate any savings accounts that you may have and incorporate them into your offset account. Every single cent counts.
Interest is calculated daily on the remaining balance. The lower the outstanding balance, the more you will save. For example, if you take out a loan of $400,000 at 5.00 per cent for 25 years, your repayment will be about be about $2,338. This equates to a total repayment of $701,508 over the term of your loan. If you pay the loan out over 10 years rather than 25, your monthly payment will be $4,242 a month. But the total amount you will repay over the term of the loan will be only $509,114 – saving you a massive $192,394.
Early in the life of your loan you’ll be paying off interest only (a nasty reality of compound interest).
4. Clever use of your credit card (using an offset account)
Most have a love-hate relationship with their credit card, but in the world of home loan repayments, they’re an essential tool to minimise debt.
Many credit cards have an interest-free period (normally 55 days), meaning that you can buy now and pay for those goods in 55 days. This means that despite a purchase (such as bills, shopping, etc.), your cash stays in your account and is used for daily interest calculations.
These all-in-one loans or 100 percent offset loans allow you to use your mortgage as your key financial product; EFTPOS and chequebook accounts are normally integrated as well.
Clever use of an offset account means that it’s possible to pay a 25-year loan off in less than half the time.
5. Frequent payments
Paying your home loan off fortnightly rather than monthly can save you thousands (head over to our mortgage calculators to see a visual representation of the savings). You basically split your loan into two, and this becomes your fortnightly payment – it literally saves hundreds of thousands over the life of a loan.
The reason the fortnightly payments are so effective is for two reasons: first, 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. Second, because you’re paying more frequently – remembering that payments are calculated daily – you’re paying a lower amount of interest every day. Compounded over time this technique makes a huge difference. Every dollar you put into your mortgage above your repayment amount brings you close to attacking the capital, which means that over time you’ll be paying interest on a smaller amount.
6. Get a package
Speak to your broker about the financial packages banks may have on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser, or even a fee-free transaction account. While these things may seem small compared to what you are paying on your home loan, every little saving translates into big savings on your home loan over time.
There are also “professional” packages on offer for amounts over a certain limit, which can be as little as $150,000. Those that qualify for professional packages may see significant savings (although they may come with other fees that lock you into their product for a period of time).
7. Debt consolidation
Many lenders will allow you to consolidate (or refinance) all of your debt under the umbrella of your home loan. This means that instead of paying higher interest rates on your credit card and/or personal loan, you can transfer these debts to your home loan and pay it off at a far lower rate.
This does mean that monthly payments may increase (slightly), and the interest you pay is spread over a longer period of time, but there ways to ensure that this method doesn’t come at a disadvantage. Talk to your broker about how debt consolidation is best managed.
8. Split your loan
Many borrowers worry about interest rates and whether they will go up but don’t want to be tied down by a fixed loan. A good compromise is a split loan, or combination loan as they are often known, which allows you to take part of your loan as fixed and part as variable. Essentially this allows you to hedge your bets as to whether interest rates are going to rise and by how much.
If interest rates rise you will have the security of knowing part of your loan is safely fixed and won’t move. However, if interest rates don’t go up (or if they rise only slightly or slowly) then you can use the flexibility of the variable portion of your loan and pay that part off more quickly.
9. Forgo the luxuries
It’s easy to spend money on minor ‘luxuries’ such as coffee, alcohol, fancy lunches, home-entertainment, and other discretionary items. Before you know it you’ve spent $10000 a year. Before you buy your next fancy-pants coffee, understand that you’ll be paying interest on that item until your loan is paid off.
We’re not suggesting you live a life void of enjoyment, but it may be worth making cost-effective and sensible changes that will shave years off your home loan.
Don’t let the tail wag the dog. It’s easy to let your home loan run on autopilot and essentially ignore it. However, working with us means that we’ll constantly monitor your product for rate and other changes, we’ll routinely contact the bank on your behalf to negotiate a better rate, and we’ll often assess circumstances to determine if another product might offer more significant
Together, we’ll stay informed and stay ahead of the game.
11. The offset account
As mentioned earlier, the offset account is a powerful weapon to attack your home loan and pay it off faster than you ever could without it.
Instead of earning interest, any money you have in your offset account works to offset the interest you are paying on your home loan. For example you may have a mortgage of $300,000 at 5.00 percent and an offset account with $50,000 in it earning 3 percent. This means that $250,000 of your loan is accruing interest at 5.00 percent but the rest is accruing interest at just over 1 percent (5.00 percent on your loan less the 3 percent the $50,000 in your offset account is earning). Imagine how much you can save!
Of course, the best sort of offset account pays the same rate as your loan (100 per cent offset).
12. Pay first payment before due date
With most new loans, the first installment may not become due for a month after settlement. If you can manage it (and your lender will let you), pay the first installment on the settlement date. If you do this, you will be one step ahead of the lender for the term of your loan. Every little bit counts.
13. Make sure your loan is portable
If there is any chance that you will move house during the course of your loan, make sure that your lender will allow you to transfer your loan to a new property and that it won’t charge you the earth for the privilege.
Be careful. If you sell up and buy a new house, you could find yourself down thousands in discharge costs on your old loan and establishment fees on your new product.
14. Smaller lenders
It’s normal to be attracted towards big-brand primary lenders, but the loans they have on offer often come with a ‘premium’. Don’t be afraid to consider a loan with a smaller lender if their product offers suitable advantages. Smaller lenders usually come at the expense of other features – such as feature-rich Internet banking (it’ll be there… but often won’t be as good as the big-4).
Your broker will discuss these issues with you.
15. Professional discounts
Many lenders will offer discounts to certain professions, such as doctors, lawyers, and dentists. Others might include Government jobs such as police officers and firefighters. These specialist packages often have requirements such as a university degree or other educational requirements. Your broker will discuss these options with you should you qualify.