Has that pay rise got you stumped? For homeowners, there is a huge incentive to accelerate your repayments on your home loan because it could save you thousands in interest but there are a few things to consider before doing so, namely do you have any other outstanding debts?
Save money by accelerating your repayments
One way to save on interest with a home loan is by accelerating repayments. Accelerating your repayments means that the borrower makes extra repayments on their home loan to shorten the length of their loan term, with the added bonus of saving on interest. An example of this is by adding an extra $300 per month to a $300,000 home loan, with an interest rate of 7 percent, you could save over $100,000 and reduce a 25-year loan by six years and seven months.
In the first five to eight years of your home loan your repayments are predominately spent paying off the interest, so this is the best time to make extra repayments because it will cut your interest and shorten the length of your loan.
Another way to accelerate your repayments is to find a cheaper interest rate. Shop around and compare home loan rates to see if you can find one that is cheaper and willing to waive any fees for switching.
When you shouldn’t accelerate your home loan repayments
If you are like many Australians who have credit cards, car loans, store cards or personal loans, you would be wise to pay these off first, before touching your home loan. While your home loan is your largest debt, it more than likely has the lowest interest rate and therefore is costing you the least.
Make sure you look into the interest rates you are paying across all your debts and pay off the one with the highest interest rate first. Check with your lender if you will incur any fees for accelerating your repayments. If there are fees this will have to be factored into your calculations to make sure you see the benefits still.
If you considering accelerating your repayments start your research by comparing home loans using RateCity’s home loan comparison tools. Need to do some calculations? Check out the RateCity mortgage repayment calculator.