Loans are structured for the benefit of the banks. So if you follow their advice, it will cost a lot of your hard earned money. Taking some simple steps will make a huge difference, not only to the length of the loan but to the amount of interest that you can save over the term of the loan, giving you financial freedom much sooner.
Banks will generally try to sell you the benefit of taking a 25 to 30 year mortgage, making it seem affordable for you to borrow compared to a 10 year loan where repayments will be much higher. But once we start on such loans most of us get caught up in the day-to-day expenses and want to enjoy luxuries today rather than wait.
But by putting the focus and priority on paying off a little extra of the loan whenever we can, we can pay off our home loan years earlier and enjoy much more freedom than we could ever dream of.
My four tips below will help you pay off your home loan quicker and save you thousands. You can use one or a combination of these suggestions to tailor it to your current situation for maximum benefit.
- Use a 100% offset account. This is the number one tip for paying off your home loan quickly. Many of us have a savings account that we deposit our salary into; banks normally offer somewhere between 0.5% – 3% interest on the balance and you pay tax on it, so it is costing you money. Choosing a home loan with a 100% offset account will help by offsetting the daily balance in your account against the balance of your mortgage, therefore reducing the term of the loan.
- Make fortnightly repayments instead of monthly. There are 12 monthly repayments, but if you pay fortnightly, it does not add up to 24 (12×2) but 26. So, you make one extra repayment a year when paying fortnightly. The trick, however, is to make fortnightly payments exactly at half your current monthly payment.
- Make additional repayments when possible. To pay off your loan quicker, you do need to make extra repayments. The earlier you do this, the less interest you will pay and make headway into owning your home sooner. For example, on a $350,000 loan, at a 5% interest rate over 30 years, if you pay an extra $300 per month you will save $96,537 and slash nearly 7 years and 9 months off your loan. If you pay an extra $200, you will save 5 years and 9 months, or an extra $100 will see you pay the loan in 27 years. But it doesn’t always have to be large or regular sums that you contribute; any amount will help pay it off quickly. So, reconsider where to put your bonus, your tax refund or the extra money that is sitting in the bank. Use any of the online calculators and you will be amazed at what you can save with a little extra contribution.
- Avoid loans that penalise you for making extra contributions. Sometimes banks tempt us with short term attractive options like introductory or honeymoon rates and fixed rate loans. But there is always a catch – they either limit the amount of surplus cash that you can pay into the fixed loan or make you pay a higher interest rate after the honeymoon period.
Most of us are enticed to enter into a 30 year loan agreement. But it is important to know that we have choices and options to reduce the amount and the length of our home loan. Life changes a lot in the period it takes us to pay off a mortgage and our financial circumstances will change too. Knowing these options will make a huge difference in enabling us to own a home as quickly as possible.