5 EASY TIPS TO PAY OFF YOUR LOAN SOONER
Australian home loan interest rates remain at historic lows, and the opportunities for paying off a mortgage early are better than ever. Used in conjunction with low rates, here are some extra steps that can speed up loan repayments and reduce your loan balance.
1. MAKE ADDITIONAL REPAYMENTS
One of the easiest ways to quickly reduce the balance of your mortgage is to increase the repayments by a small additional amount . The minimum repayments required pay off mainly the interest on your loan. So by adding a small extra amount, this comes directly off the principle of your loan, cutting the overall term and saving you thousands of dollars in interest.
Small additional repayment can have a very large impact on savings.
As an example: If you have a $500k loan, with monthly repayments of $2,387pm (30 years term at 4% interest)
If you can afford to put aside $50 a week extra ($217pm) : you will repay the loan 4 years & 4 months early, and save $59,832 in interest
If you pay $100 a week extra: you will repay the loan 7 years and 7 months early, and saving $101,708 in interest
An additional repayments calculator will quickly show what savings can be achieved – but best you talk to Financewest to calculate this accurately.
Note – If you have a fixed rate loan, you should be aware there may be large penalties for making additional repayments. Always check with your broker at Financewest before making any additional payments.
2. MAKE MORE FREQUENT REPAYMENTS
Home loans are often structured so that you make monthly repayments. But making fortnightly repayments instead can reduce the term of a loan and save interest. By making fortnightly repayments, you are paying the equivalent of half of your monthly repayment every two weeks. This allows you to make the equivalent of one extra monthly repayment per year. Extra repayments will ensure the loan balance is lower at the time of the month the interest is calculated.
3. USE AN OFFSET ACCOUNT
Most lenders allow you to package a mortgage with an interest offset account. An offset account allows you to reduce the amount of interest paid on your loan by offsetting the amount in the (offset) account against your loan balance. Wages and other income can be deposited into your offset account. Note that you don’t earn interest on the funds in the offset account, and that offset is usually only available on variable rate loans.
4. SEEK OUT LOANS WITH BETTER INTEREST RATES
Although obvious, many borrowers take out a mortgage and then stop following the home loan market. With interest rates constantly changing, it pays to monitor the latest rates. Contact Financewest and ask if we can find you a better interest rate to help repay your loan sooner
5. KEEP PAYING THE SAME WHEN INTEREST RATES DROP
When a lender reduces the interest rate on its home loans, usually in line with a cut in official interest rates, your first thought may be to reduce your loan repayments accordingly. However, by maintaining your loan repayments, you effectively repay more than the minimum loan repayment directly off the principle. If it’s possible to do so, this will help you cut the term of the loan and save on interest.
For more information on how you can pay off your home loan sooner, contact the team at Financewest.