Cherie Mildwater explores how to swipe years off your home loan and save thousands.
March 29, 2010
Having a mortgage is a massive long-term financial commitment. So if there was a way for you to pay it off sooner, wouldn’t you jump at the chance to find out how? Here are some tips to show you how easy it can be to own your home sooner and save potentially tens of thousands of dollars.
Many home owners meet their standard monthly repayments without making additional payments. This will have no effect on your mortgage term, meaning you will pay it off just before retirement. By making additional payments on your loan, you can cut years off the term.
Here are four good reasons why you should make extra repayments on your home loan:
- You will pay it off sooner
- There are tax exemptions on the interest you save compared to being taxed on interest you earn in a savings account
- You will save loads on interest charges
- It lessens the impact of rising interest rates
RateCity calculated that if you saved $400 per month, you would need to have a 10 percent interest rate on your savings account to have the same value as adding that same amount to a home loan of $300,000 with a projected average rate of 7.00 percent. That is with the average marginal tax rate of 30 percent (if you earn between $35,000 and $80,000). With the average online savings account rate of 4.00 percent, it is obvious that your money would be better saved in an offset account linked to your home loan.
Everyone is charged tax on the interest you earn from deposit accounts so the advantage of using your savings on your loan is that you will save even more. Not only will you reduce the term on your home loan but you will also reduce the amount of interest you pay.
For those who don’t have any savings in deposit accounts, you can still decrease the life of your home loan by making affordable additional repayments. Work out what you can afford and how often you can pay. If you were to make an additional payment of $150 per month on your home loan of $400,000 with a projected interest rate of 7 percent, you will potentially decrease the term by three years and save over $64,000 in interest.
Here are some tips on how to afford to make extra repayments:
- Cut back on your weekly spending, it’s the small things that count. Make your lunches rather than buying every day, cook dinner at home rather than eat out
- Budget, budget, budget and stick to it. This may be difficult initially but once you get the hang of it you will wonder what you used to spend all your money on before.
- Look at your needs versus wants. Before you purchase something, think to yourself ‘do I really need this’, if the answer is no then put it down and walk away.
- Look at other ways you can cut back and implement those changes immediately.