If we could pay off our home loans in 10 years, instead of 25, we wouldn’t hesitate but the monthly repayments would almost always be too high to keep on top of. However every little bit counts so making additional repayments when you can, will potentially save you thousands off you loan.
The fact is, the more you owe, the more you will pay on interest so it’s in your best interest to pay off your home loan as quickly as possible. Be careful not to overextend yourself because if you fall behind and end up missing a repayment you could end up paying interest on your interest.
Fortunately, there are ways borrowers can save time and money, including making additional and/or more frequent repayments, as well as clipping the length of the loan.
Consider switching lenders
Looking around for cheaper interest rates is a great way to save money and pay off your home loan sooner. Before jumping ship have a chat with your current lender and see if they can offer you a better interest rate first.
Find out what fees are involved in changing lenders before you make the move.
Initially, the majority of regular payments into a home loan primarily cover the interest and not the principal. Making extra payments early on, no matter how small, can make a big difference over time.
More frequent repayments
If your lender allows it, why not make more frequent repayments – say fortnightly rather than monthly. Paying your house loan fortnightly actually equates to paying 13 monthly instalments per year, instead of 12 (depending on your lender). Therefore if you can make more repayments, it makes sense that you’ll trim your home loan faster.
Lump sum payments
Paying lump sums, such as a salary bonus or other windfalls, into the home loan can also help shave additional interest repayments and the loan term.
A great trick is to pay your annual tax return (if you get one) directly into the home loan. Do this, and you will notice some interest and time savings.
Shorten the length of the loan
The standard term in Australia for a house loan is around 25 years. As a rule of thumb, the longer the loan term, the lower your regular repayments. However, what you save in repayments now, you will certainly pay for in additional interest in the future.
Therefore by reducing the average 25 year home loan by a number of years, in consultation with a lender, your regular repayments will increase. However, this strategy will help reduce the interest you’ll pay over the long term.
Managing mortgage stress
Even with the best strategies, we can fall into difficulties with our repayments. Should this happen, act early and preferably before missing a payment – by contacting your lender. Most lenders will consider your needs, and can offer options to help you stay on track.