Managing home loan repayments to pay them off sooner
28th September, 2016
A lot of homeowners tend to set and forget their home loan, not realising there are easy ways to reduce repayments and pay it off sooner. This is silly when you consider it’s usually the biggest household expense, so even a few small changes can make a huge difference to your bank account.
The main thing to understand is that paying any amount greater than the minimum repayment required will reduce the principal, meaning the actual loan amount, and therefore the resulting interest.
So here are some simple ways to pay off your home loan sooner.
If you are currently expending a big instalment each month, instead pay half of that sum every fortnight. Why? Well there are 12 months in the year but 26 fortnights. So if you currently pay $2000 a month you would repay $24,000 a year, but if you switch to paying $1000 fortnightly you end up knocking $26,000 off your loan in the same period.
Round up your loan
Another easy strategy is to make your repayment figure nice and simple. For example, if your current fortnightly minimum is $834 round it up to $900. Given a $300,000 loan at 6.00% and with a 30 year term, this would save almost $75,000 in interest over the life of the loan and shave more than five years off the term!
Make the most of an offset account
An offset account is a popular tool that can save thousands and years off your home loan when used effectively. It basically works like a standard transaction account but whatever amount you have in there counteracts against your loan balance. So if you have $10,000 saved in your offset account and $200,000 remaining on your loan you will only be charged interest on $190,000. It won’t change your repayment amount but a greater proportion will be attributed towards the principal rather than the interest.
Make the most of lump sums
Whenever you come across some extra money – bonus, tax return, lotto win – put it towards your home loan, or at the very least into your offset account. The same logic applies if you get a pay rise. If possible dedicate some of the extra income towards your mortgage. These small chunks now will have a big impact in the long run.
Get a Home Loan Health Check
Every two or so it’s recommended you review your current deal. With new products constantly entering the market there may one with a better rate and fit for your lifestyle later down the track.