Typically, a home loan period is 25 or 30 years to pay off, but that doesn’t mean you should follow this rule, you should be aiming to get ahead on your mortgage and pay if off sooner.
Your home loan is probably going to be the biggest investment you make in your lifetime. Many homeowners fail to make small tweaks to their repayment’s schedules, which can save you tens of thousands of dollars off the life of your loan.
The easiest way to reduce your mortgage is increasing your repayments.
Let’s say you have a loan of $500,000, charged at 3.00% over 30 years, your monthly repayment would be $2,529.62. Make a small tweak by changing your repayment to weekly, then your minimum repayment would be $583.41. By adding an extra $100 a week to your weeekly repayment, you would save yourself 6 years and 8 weeks off your loan and $68,049.38 in interest.
Such a small tweak can make such a big difference to the overall loan. As time goes by it’s recommended to keep increasing this payment when you can afford to.
We’ve put together some tips to help you get ahead on your mortgage, which can save you significant amount of money on interest charges in the process.
Check you’re paying a competitive interest rate
With home loan interest rates currently at all time loans, with variable interest rates ranging from as low as 1.99 to 2.60%.
If your interest rate doesn’t lie within this range, you need to talk to your lender and negotiate your interest rate. Ensure you compare interest rates on similar loans, before speaking to your lender and ask your current lender to match it or offer you a cheaper alternative.
Comparisons websites can be useful, but keep in mind they are businesses too and may make money through promoted links and they may not cover all your options.
Switch lenders for lower rate
It might sound like a simple idea, switching out of your current loan and taking out a loan at a lower rate can mean the difference of years and thousands of dollars.
If you have a loan that is tricked up with all the features, or even if you have a standard variable loan, you might find that you could get a no frills rate that is as much as a percentage point cheaper than your current loan.
However, before you jump the gun, check out what the costs will be to switch loans. For example, there may be exit fees payable on your old loan and establishment fees and stamp duty on your new loan. Work it all out and if it makes sense, go for it. A good place to start when choosing a home loan is to visit Moneysmart website.
Need help refinancing?
Oracle can help you to find the right loan to fit your needs and circumstances.
Pay a little more
You don’t need to pay a lot extra to reap the benefits. Paying just a few extra dollars can make a big difference or even months off your loan term.
Another good way to add extra money to your repayments is, when you receive a pay rise instead of spending the money, add the extra cash straight onto your mortgage.
Change your repayments to fortnightly
Rather than making repayments monthly, you could aim to pay half your regular repayment each fortnight. Over the course of a year, you’ll make 26 repayments. That’s equal to 13 regular monthly payments, instead of the 12 monthly repayments your lender will typically ask for. So, you’ll make one month’s extra repayment each year without too much impact on your hip pocket.
But keep in mind your home loan lender will have restrictions on how much extra you can pay off your loan. Ensure you know the restrictions, or you could face fees for paying too much off your loan – interest is charged at lower which further reduces the term.
Make lump sum payments
You may receive lump sums of cash throughout the year, such as tax refund or a work bonus.
It’s likely money you’ve learned to live without to this point, and if so, chances are you won’t miss it. Making a lump sum payment on your home loan (or in an offset account – more on that later) could dramatically accelerate a loan reduction because the money comes straight off the loan balance.
Consider home loan offset
Instead of being paid separate interest on your savings, the value of any cash in an offset account is instead deducted from your home loan balance, with interest calculated on the difference.
As an example, if you have a home loan of $400,000 and savings of $20,000 in a 100% offset account, the interest you pay will be based on a loan of $380,000. This can reduce your monthly interest costs, meaning if your regular repayments stay the same, more of each payment goes towards paying down the loan principal, which could in turn help you pay off your home loan sooner.
An offset account is great way to make your savings work for you, as you’ll normally save more home loan interest than you would be likely earn on a separate savings account. You can achieve a similar result if your home loan lender offers a redraw facility, though we recommend checking for any fees or time delays that may apply to accessing the money.
Be sure to note that home loan packages that include offset accounts or redraw facilities may charge higher fees and rates packages that don’t include these features, it’s a good idea to take this into consideration when comparing.
Consolidate your debts
If your home loan were to rise, then more than likely your personal loan will also rise and so will your credit card. Talk to your home loan lender, as many allow you to consolidate by refinancing all your debt under one umbrella of your home loan. So instead of paying up to 20% interest on your credit card and personal loan, you can transfer these across these debts to your home loan and pay it off at a much lower rate.
Split your loan
Splitting your loan is essentially making part of loan fixed and the other part as variable. By splitting your loan, you will get the added security that if interest rates were to rise you can feel safe that your loan is safely fixed and won’t move.
Interest rates aren’t expected to go up anytime soon, so you can use the flexibility of the variable portion of your loan and pay that off more quickly. Check repayment restrictions on this as well, as sometimes fixed loans don’t allow for additional repayments to be made.
Forgo luxuries you don’t need
Were not saying reduce your morning coffee altogether, but why not cut this down to one or two a week and only one bought lunch a week and you will save thousands, that you can add to your mortgage.
Finally don’t forget about your mortgage
It’s vital you keep yourself up to date with what is happening in the marketplace. Rates change, new products and changes in the market, its crucial you stay alert and seize an opportunity or negotiate a better deal.
Always stay informed and stay ahead of the game.
It is a good idea to check with your mortgage provider to determine whether there are any fees involved in any of the above strategies and to do your own calculations.
Oracle can assist you in finding the right loan to fit you and your family’s needs.