Why pay down your home loan faster
You might wish to boost your repayments now, so that you can enjoy the freedom of being mortgage-free. This could help bring forward the overseas holiday you’ve been promising yourself, or help your children complete their education.
Perhaps you’re planning on renovating your home to add value to your property or you’re interested in purchasing an investment property or investing in shares.
Here are some ideas that could help get you there sooner.
1. Open an offset account
A mortgage offset account is a savings or transaction account linked to your home loan.
It can help you pay less interest because, every day, the money in your offset account is offset from the outstanding balance of your home loan before the interest is calculated.
To make the most of this, you could have your salary paid into your offset account and use a credit card to cover your day-to-day expenses. This is a low-cost way of keeping money in your offset account. Remember to pay your credit card bill in full, or if you have a balance transfer to pay the ‘interest free days payment’ before the end of the interest-free period.
2. Make more frequent repayments
This isn’t always an easy task. But if you change your repayment cycle, you could end up making extra repayments. Why not consider changing your repayments (minimum or extra) to fortnightly. This way, you’ll end up paying more off your loan each year. How?
Say your monthly repayments are $2,000. By the end of the year, you’ll have repaid $24,000 (not accounting for interest). If you change this to $1,000 a fortnight, by the end of the year you’ll have repaid $26,000. This is because there are 12 months in a year—and 26 fortnights.
This extra amount comes directly off your loan principal and reduces the amount on which future interest will be calculated. As the interest is less, more of your repayment goes towards paying off the principal off your loan, so your mortgage gets paid off sooner.
3. Make extra repayments
If your home loan allows you to make extra repayments, it’s as simple as increasing the amount you pay each month. You may need to check with your banker.
A tax return, a work bonus, a birthday present, a sale on eBay – make a habit of ploughing every lump sum you receive into your mortgage.
4. Fixed versus variable rate loans
Both have their pros and cons. If you want to pay off your loan faster, you might opt for a variable rate over fixed. It’s more flexible, letting you make unlimited extra repayments at no cost.
If you have a fixed-rate loan now, you’re not stuck with it forever. Once the fixed term ends, you can roll it over to variable and make extra repayments. Don’t forget, until your fixed rate term is up, you may be charged break fees to switch from fixed to variable.
Some borrowers split their loan between fixed and variable rates. If you make additional payments, you’ll need to consider if there are limits on how much extra you can pay on your fixed loan.
If the timing is right and you want to pay off more, you could consider shifting a portion of your loan to variable.
5. Look at ways to cut back
Be tough but realistic – your aim is to make changes that you can live with for at least the next five years.
Once you’ve calculated how much you can save, arrange to have that amount paid regularly and automatically into your mortgage account.
Cutting out just one cup of takeaway coffee every working day could save $1,000 a year. Always keep an eye out for new opportunities, including better deals on essentials such as gas and electricity.
6. Rent out a room
Enlist other people to help pay off your mortgage by renting out your spare room.
Accommodation websites such as airbnb.com.au can help with short-term lets or you might prefer a longer-term arrangement with a local or overseas student.
You might need permission from your local council and, if you’re living in an apartment, you must check the rules with the body corporate. If all goes well, you could meet some interesting people as you slash years off your home loan.
7. Reduce your payments as a last resort
When variable interest rates fall, some people like to reduce their repayments. It’s tempting, but think about keeping your repayments as they are. It’ll mean you end up paying more off your loan sooner.
On the other hand, if rates keep steady for a while, think about adding an extra $20 dollars on top of your normal repayments. It really does add up.
If you’re thinking about applying for an interest-only loan structure to reduce your payments, do your research. Australian Securities and Investments Commission (ASIC) have some useful information for customers using an interest-only repayment period as part of their loan term. Check out their MoneySmart guidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
Speak to us to find out more about paying your loan off sooner or if you are considering refinancing
Source: NAB
Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/home-property/pay-off-home-loan/pay-off-faster
National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.
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