February 15, 2018
Wouldn’t it be amazing, and financially liberating, if you could stop making your mortgage repayments years before the end of your loan term? Paying off your home loan faster could save you lots of money on interest. It can also free up your budget to meet other financial goals like investing, building your savings, or simply being able to live debt-free and enjoy the lifestyle you want because you are no longer directing a huge chunk of your income towards a home loan.
Repaying your mortgage early shouldn’t be viewed as a pipe dream but rather as a financial goal – one that sits towards the top of your list of money management priorities. The faster you can reduce your loan amount, the less interest you’ll pay each month, and the easier it will be to pay down your remaining balance.
Think of it this way. If you have a 30-year loan for $500,000, at a 4% interest rate, your monthly mortgage repayments would be $2,388 per month. At the end of 30 years, you’d have paid $859,348 on your $500,000 loan.
Pay off your loan in 25 years, paying about $250 more per month, you could save over $67,000 in interest. If you were able to pay down your mortgage in 20 years, with monthly repayments of $3,040, you could save $133,334 in interest, and you’d live ten more years mortgage-free!
You don’t have to refinance to a shorter term or choose a short term when you apply for your loan. As long as you can make early repayments without penalty on your loan, anything you can repay over your monthly mortgage balance will pay you back in the end.
Use these tips for paying off your home loan faster. It may take a couple of lifestyle changes and some budgeting work, but if you weigh up the small sacrifices you have to make now against the financial freedom you’ll have sooner – and the thousands you could save – it’s worth it.
When you are comparing home loans, it’s important to choose one with a low rate and with the right features. You may want to look for a loan product with unlimited early repayments and an offset account, which will let you reduce the interest you owe by depositing money into an offset account. You are only charged on the principle minus your offset savings. Over time, this can lead to a sizable interest reduction and it can shorten the length of your loan.
In this example scenario, on a $400,000 mortgage, the $50,000 savings in the offset account are subtracted from the mortgage and interest is only charged on the remaining $350,000. Further savings in the offset account will in turn reduce the amount of interest charged over the life of the loan.
While fixed rate loans do offer stability, they are not useful if you plan on repaying early. Often, fixed-rate loans have limitations on how much you can repay ahead of time and they don’t generally come with flexible features like offset accounts and a free redraw facility. Also, if you want to get out of a fixed rate loan, you may have to pay hefty break fees. If you want to get out of debt faster, you’ll need your loan product to be flexible enough to allow you to set the pace, penalty-free. This means a basic standard variable rate home loan with the right features is a better option.
Pay fortnightly instead if your loan has the option. This is one of the easiest ways to repay your loan faster because you won’t notice the difference in your disposable income but your loan will feel the difference. You are essentially splitting the monthly repayment in two, and paying every fortnight. With 26 fortnights in a year, you end up making 13 ‘monthly’ repayments, instead of the 12 you’d make with monthly repayments. Over the course of your loan, this difference will add up.
Here’s another tip that will help you get out of mortgage debt faster without making a difference to your finances. When interest rates go down and your loan repayments decrease, keep paying the higher repayment amount. You’ll reduce your loan without having to make any budget changes.
If market rates go down, you may also be able to save thousands by refinancing to a cheaper loan. Compare how much it will cost you to refinance to what you’ll save. If you still owe most of your loan, refinancing to a lower rate can be well worth the one or two thousand you’ll likely pay in refinancing fees. Then, keep paying your higher rate on your new loan, and you’ll reduce your mortgage term significantly.
To get the biggest impact, pay more early on, when your principle – and the interest that accrues on it – is at its highest. This may be difficult as you may have just worked hard to save for a downpayment. But, making any extra repayments or lump sum payments at the beginning of the loan will help you quickly reach the point where more of your money is going towards reducing the principle. Tightening your budget so you can make larger repayments in the first couple years of your loan will have more of an impact than making the same extra repayments years later.
With these loan repayment strategies, you’ll be able to get rid of your mortgage faster. Use whichever ones work for your financial lifestyle. Every dollar you repay early will become a lot more money in the pocket of your future self.
Things you should know:
This information does not constitute as financial advice. Terms and conditions, fees and charges and normal lending criteria apply.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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