17 Jan 2018
A home loan may seem like a long financial commitment, especially if you’ve signed up to a 30-year term. But there are ways you could reduce the term of your mortgage, sometimes significantly. Here we show you five simple strategies that could help you work towards reducing term of your loan and help you to try and pay it off a little earlier.
1. Set up a redraw account or mortgage offset facility
A redraw account and mortgage offset facility both work similarly, insofar as any funds you contribute to them get offset against the interest you’re paying on your home loan.
In other words, if you have a home loan of $500,000 and $100,000 in your redraw account or offset facility, you’ll only pay interest on $400,000. Because your home loan repayments don’t change that means you’ll be making a bigger dent into your home loan principal than you otherwise would.
One of the main differences between a mortgage offset account and a redraw facility is that an offset account is generally a standard bank account which lets you access your funds at any time. In an redraw facility, your funds are usually more difficult to get hold of.
Both offset facilities and redraw accounts are usually only available with a variable home loan. That could make a variable or split home loan a better option than a fixed rate home loan if you want to try and pay it off fast.
2. Pay your salary into your offset account
If you do choose to set up an offset account, using it to full advantage means always having as much money as possible in it. The amount you’re offsetting against the interest on you home loan is calculated daily. So you could choose to have your salary paid directly into it to maximise the available funds.
To maximise this approach, you could also investigate the benefits of putting all of your living expenses on a credit card. To make this work you need to ensure you budget carefully and pay the credit card off in full each month before the due date. That way, you get to keep your money in the offset account for as long as possible while taking advantage of your card’s interest-free period.
If you choose this mortgage-busting technique, you really need to be disciplined.
3. Up your repayments
If you have a redraw facility on your home loan, you could choose to pay more each month than you are obliged to.
That may sound difficult but it doesn’t have to be. One of the easiest times to contribute extra is if you find yourself earning more or spending less. For instance, if you receive a pay rise, you could choose to contribute some or all of the extra money towards your mortgage. Alternatively, if interest rates fall, you could consider making the same contribution you’re used to paying. It could really make a difference to the term of your loan without any change to your current lifestyle at all.
For example, if you were paying $5,000 a month and a change to interest rates meant your repayments would fall to $4,700, you could continue paying the same as you were. Then you’d contribute an extra $300 a month or $3,600 over a year.
4. Increase the frequency of your repayments
Another way to reduce the term of your home loan without too much pain is simply to pay into it more often.
If you’re paying monthly you could consider switching to making fortnightly or weekly payments instead. But here’s the trick. Don’t simply opt for the minimum repayment. Instead, divide what was your monthly repayment by two if you’re paying fortnightly or four if you were paying weekly to get your new home loan repayment. This works because there are 52 weeks in a year, or 26 fortnights, but only 12 months.
For instance, if you’re currently paying $4,000 a month and you change to a weekly cycle, you could plan to contribute $1,000 each week. That way over the course of the year, you’d pay $52,000 into your home loan. If you’d been paying monthly you would have contributed only $48,000.
That’s just a whole extra repayment you would have made – which could help save months or even years off your home loan – and you probably won’t have felt it much at all.
5. Use your lump sums wisely
Sometimes in life we’re lucky enough to receive a windfall. That could be because of a work bonus, an inheritance or gift, or even an unexpected tax refund.
When we come across money like that, it can be tempting to spend it on something that won’t last – like a holiday or new appliances for the home. But before you go out and hand over your newfound wealth, consider for a moment just how far that lump sum might go in helping you pay off your home loan. For example, imagine you take out a home loan of $450,000 at an interest rate of 5% and six years into that loan you receive a gift of $50,000. If you paid that whole amount into your redraw facility or offset account you could potentially be shaving a full five years off your home loan.
That’s a half a decade longer being mortgage-free than you otherwise would be. Not a bad gift at all.
If you would like to learn more, attend one of our information seminars or speak to us about your mortgage options please don't hesitate to contact us.
i. Realestate.com.au "How you could pay off your lome loan early", Date accessed: 17/1/18 https://www.realestate.com.au/home-loans/how-you-could-pay-off-your-home-loan-early