As Australia enters its first recession in almost 30 years, getting on top of your debts has never been more important. Your home loan is by far the biggest debt you will ever have, but there are ways you can shave years and thousands of dollars off of your loan.
And it could cost as little as $50 a month to do so.
A home loan that allows you to make extra repayments may also allow you to pay off your home loan faster, depending on how much you can add. Extra repayments save you time on your loan by chipping away at your interest much faster than your original home loan timeline.
For example, on a hypothetical $500,000 mortgage with a rate of 3 per cent, you would pay $2,108 a month over 30 years and 1 month until the debt was repaid, including $258,892 in interest.
However, if you increased your repayments by just $50 a month, you would pay off the loan in only 28 years, 11 months, and pay $10,000 less in interest.
Mortgage repayments on $500k loan at 3%
|Extra repayment amount||Monthly home loan repayment||Time taken to pay off loan||Total interest paid|
|$0||$2,108||30 years 1 month||$258,892|
|$50||$2,158||28 years 11 months||$248,200|
|$100||$2,208||27 years 11 months||$238,839|
|$200||$2,308||26 years 1 month||$220,997|
Source: ASIC MoneySmart Mortgage Calculator. Notes: Hypothetical example does not factor in fees or changing rates over 30 years.
You can also make irregular lump sum payments if you cannot commit to a fixed amount above the minimum monthly repayment. You just have to ensure your home loan allows for extra repayments.
Some lenders may cap the amount you can repay in a year, so ensure you take a look at the terms and conditions of making extra repayments with any lender.
Not all home loans come with this feature as lenders generally want you on their books paying interest for as long as possible. If you’re not sure your home loan does, you may want to search for and compare home loans that offer the ability to make extra repayments.
To help you in your search, RateCity has compiled a list of top home loans that allow for extra repayments: