How to pay off your home loan quicker (and save a small fortune)
Financial Planning | 28/03/2017 |
4 min read
According to a recent survey conducted by finder.com.au, nine out of ten Australian mortgage holders are trying to pay back their home loan ahead of time. But what’s the best way to get ahead of the curve and minimise your interest payments?
Increase your repayments
The most popular strategy is to increase payments. Rather than paying your designated monthly amount, you may be able to afford an additional $100, $200, or similar. Not only does this reduce your interest charges, it helps create a buffer against future rate rises. You can also make extra payments if you receive a windfall or a bonus at work.
More frequent payments are also a good strategy. Instead of paying your mortgage off monthly, pay half the monthly amount each fortnight. After all, there are only 12 months in a year, but 26 fortnights, so you effectively end up paying an extra month each year.
Most home loans are structured so that you’re mostly paying interest for the first few years without making any inroads into the principal. If you can manage to pay more principal during these early years you can potentially save tens of thousands in interest throughout the course of the loan
Consider an offset account
An offset account can also prove useful. With your salary going directly into your mortgage account, the principal will drop and that means you will pay less interest. For instance, if you had a 100 per cent offset account with $50,000 contributed annually on a home loan of $400,000, you would see interest calculated on a balance of $350,000 instead of $400,000.
If you’re looking at a honeymoon rate on a new home loan, do your homework and make sure that the rate you pay at the end of the honeymoon period is not substantially higher. If that is the case, it could eliminate any gains you may have made in that first year of lower rates. But be aware that switching to a cheaper loan might incur a high exit fee.
Negotiate a better deal
If you are unhappy with your current rate, then talk with your existing lender to see if you can negotiate a better deal. But make sure you do your homework first and check out what other lenders are offering so that you are in a better negotiating position with your current lender. Most lenders would rather hold on to existing clients than lose them to a competitor.
When negotiating your home loan, you might be able to access a package from the lender giving you some beneficial extras such as discounted home insurance, fee-free credit cards or fee-free transaction accounts. Or you might be able to waive the fees associated with the loan.
With interest rates expected to rise in 2017, this may be a good time to consider fixing part of your loan to cushion yourself against future rises. In the meantime, here’s a checklist of actions you can take.
• Make extra repayments
• Pay more frequently
• Use an offset account
• Review your mortgage regularly
You can speak to an Equip Financial Planner about your home loan and how it fits into a broader, retirement strategy. For more details please click here.