How can I pay my loan off faster?

How can I pay my loan off faster?

Whether you have a home loan, a personal loan or a car loan, it’s likely that you’d prefer your debt to be paid off as soon as possible. The longer you owe money to a bank or lender, the more interest you’ll be charged, until the total cost eventually exceeds any benefits offered by the loan.

Here are five tips to help you pay off your loan more quickly, and start enjoying the benefits of a debt-free lifestyle:

Make repayments more frequently

If you currently make loan repayments once per month, consider switching to once per fortnight, or even once per week. Depending on how your lender calculates interest, a larger number of smaller repayments could ultimately pay off more of your loan each year, reducing the principal owing so you’ll be charged less interest in years to come. This could ultimately cost you less in total interest, meaning you pay less for your home or investment property.

Example

According to the ASIC MoneySmart mortgage repayment calculator, a hypothetical $400,000 mortgage paid back monthly in $2000 instalments at 5% interest will be fully paid back in 35 years and 11 months, and ultimately costing $861,835.
Switching to fortnightly payments of $1000 cuts this time down to 29 years and 5 months, and cuts the total cost down to $763,228.

Make larger repayments 

The other way to make a dent in your loan’s principal, reduce your future interest charges, and get out of debt sooner, is to pay more than what’s required each month. As long as you can comfortably afford these larger repayments without stretching your household budget too much, this short term pain could ultimately lead to longer-term benefits.

Example:

Using the previous loan ($400,000 loan, 5% interest, $2000/month) as an example, if you took a long, hard look at your household budget and worked out that you could afford to increase your repayments by 10% to $2200 per month, your loan should be paid off in 28 years and 5 months and cost $749,769.

This tip also works in reverse. If you’re looking at paying back a mortgage over a 30 year term, consider also considering a shorter loan term of 25 years. You’ll need to make higher repayments each month, but you’ll likely pay less in total interest, and be out of debt sooner.

Get a better interest rate, but keep making the same repayments

After a few years of holding a mortgage, you may be able to refinance your loan, either by getting a better deal from your current lender or switching to a new one. Refinancing a home loan can let you enjoy a lower interest rate, which can mean lower minimum monthly loan repayments. While this can save you money each month, and let you put more of your household budget towards enjoying your lifestyle, it may be worth also considering other plans.

If you could comfortably afford your mortgage repayments before refinancing, then sticking to this original repayment plan as if you still had the higher interest rate could get your remaining debt paid off much more quickly, which could in turn bring lifestyle benefits of its own.

Example:
Following on from the original example ($400,000 loan, 5% interest, $2000/month), if you were to switch to a lender offering a 4% interest rate, but continued making $2000 monthly repayments, the loan would be repaid in 27 years and 7 months, and cost $660,265.

Ignore the honeymoon rate

Some lenders offer a low introductory interest rate, AKA honeymoon rate, to new customers. While this low rate is intended to attract new customers with affordable repayments, it’s worth thinking about ignoring this low rate and making your repayments as if the regular non-honeymoon rate was in effect, much like the previous tip.

By making a dent in your loan’s principal early on, you’ll be setting yourself up for lower interest payments later in the loan’s lifespan. Plus, you’ll avoid any rude shocks when your honeymoon rate reverts to the standard interest rate, and your repayments increase with it.

Use an offset account

An offset account is a savings or transaction account that is linked to your home loan, with any funds in the account being included when calculating your loan interest.

Example:
Once you’ve paid back $100,000 of a $400,000 loan, you’ll be charged interest on the $300,000 you still owe. But if also have $50,000 in an offset account, your lender will instead calculate your interest as if you only owed $250,000.

Some borrowers have their wages or salary paid directly into their offset account, and leave as much as possible to accumulate in the account, only spending what they need. This can help to reduce the loan’s interest charges over the long term, meaning the mortgage can ultimately cost less and be paid back sooner.

It’s also important to remember that some offset accounts require you to pay fees or higher interest rates, so consider whether you can realistically afford to keep enough balance in the account for your interest savings to outweigh these extra costs.

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Learn more about home loans

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is the average length of a home loan?

Most Aussie lenders offer home loans with a 30-year term, meaning that you should pay back the full loan amount and the interest you owe on the amount in 30 years. 

However, home loans can also have a shorter or longer term. They may be as low as ten years or up to 45 years, depending on the product and lender. 

It’s worth remembering that a longer loan term usually means you’ll end up paying a lot more interest in total, but your scheduled repayments may be more manageable. In contrast, you could opt for a shorter loan term if you are comfortable making large repayments in exchange for paying less interest over the term of the loan.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How can I pay off my home loan faster?

The quickest way to pay off your home loan is to make regular extra contributions in addition to your monthly repayments to pay down the principal as fast as possible. This in turn reduces the amount of interest paid overall and shortens the length of the loan.

Another option may be to increase the frequency of your payments to fortnightly or weekly, rather than monthly, which may then reduce the amount of interest you are charged, depending on how your lender calculates repayments.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What is 'principal and interest'?

‘Principal and interest’ loans are the most common type of home loans on the market. The principal part of the loan is the initial sum lent to the customer and the interest is the money paid on top of this, at the agreed interest rate, until the end of the loan.

By reducing the principal amount, the total of interest charged will also become smaller until eventually the debt is paid off in full.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.