Pay Off Your Home Loan Faster With These 5 Tips
A fall in the value of the Australian dollar and rising funding costs over the past few months has led some of Australia’s major banks to increase their variable mortgage rates. To the dismay of consumers, this means increased loan repayments for those on variable loans, and risk of further increases.
The simplest way to reduce the total amount paid on your mortgage is to pay off your home loan faster than scheduled. To put this in numbers, using the hypothetical interest rate of 5%, a $500,000 loan paid off over 30 years accrues $466,279 of interest, whereas the same loan paid off over 25 years accrues just $376,885 of interest.
Decreasing your loan term can be a risky option, so below we suggest 5 simple ways to pay off your home loan sooner without taking on extra commitment.
- Increase your minimum payment. Rather than reducing your loan term, increasing your monthly repayment gives you flexibility in case you need to redraw on the loan or revert to lower payments in future. For example, over 30 years the minimum repayment on the loan above would be $2,684 per month, but paying just $239 extra per month can shave 5 years off your loan term and save almost $90k!
- Open an offset account. An offset account allows you to place savings in a flexible account that offsets the balance of your home loan. For example, if you have a loan of $500k and place $100k in an offset account, the interest payable will be calculated on the balance of $400k. The offset account allows you to add or withdraw cash as needed, so is a good option for those needing flexibility and quick access to funds.
- Refinance to a lower rate. Although refinancing may involve plenty of time and paperwork, it can be worthwhile to take advantage of discounts and lower rates on the market. If you maintain your payments as if you were paying a higher rate, you will see the loan balance decrease faster than scheduled and pay significantly less interest over time.
- Pay weekly rather than monthly. Weekly payments mean that your loan amortises faster than monthly payments, resulting in less interest paid over time. Although the savings may seem minimal, watching your loan balance reduce weekly can be highly motivating and keep you on track with your loan repayment schedule.
- Add lump sum payments. Depositing your tax return, work bonuses or cash gifts directly to your home loan account reduces the balance immediately. Furthermore, due to the nature of compound interest, these lump sum deposits can help save tens of thousands of dollars in interest over the term of your loan.
In summary, you can avoid the long term impact of rate hikes by paying down your loan as soon as possible. Each of the tips above will help you to reduce your overall home loan cost and pay off your loan sooner.
At Lendfin, we use our relationships with the banks and small lenders to get the best deals for our personal and business clients. Whether you’re looking for a home loan, business loan or other finance, Lendfin has a product that is suitable for you. Contact us to discuss reducing your home loan faster today.