Oct 21, 2021 | Home loans, Money management

How to pay off your home loan sooner

Does staring down the barrel of a 30-year mortgage make you shudder? How good would it be if you could pay off your home loan sooner? Cutting years off your home loan may be easier than you think. Here are our top tips to help you achieve mortgage freedom.

Every little helps

Let’s start with the most obvious. One of the simplest ways to pay off your home loan sooner is to make extra repayments.

Depositing lump sums, such as a tax return or work bonus, is great when you get them. But you don’t always need large amounts to make a substantial difference. Planning for regular, small cash injections can have a big impact over the life of a loan.

For example, let’s say you pay an extra $25 a week on a $500,000 loan. That is going to save you $32,000 of interest over the life of the loan and cut two years off the term.

To work out how much you might save, check out our extra repayments calculator.

Switch to weekly

Simply switching to more regular repayments can also help save money on your mortgage.

If you make monthly payments, then you are making 12 payments a year. But there are actually 13 four-week cycles in a year. So if you switch to weekly or fortnightly payments, you are essentially paying off an extra month per year. That will mean less interest over the life of the loan.

Most loans are set up with a monthly payment schedule as default so ask your mortgage broker or lender to flip it to weekly or monthly for you.

Time is money

When you take out a loan, you get to choose how long you want it to be. Your broker or lender might initially calculate it on a 30-year term because this means lower repayments and improves your borrowing capacity.

But if you can afford higher repayments, it may be worth taking out a shorter term such as 15, 20 or 25 years. Your repayments will be higher but you’ll own your home much sooner.

Use offset or redraw facilities

Redraw facilities and offset accounts can be great tools for paying off your home loan sooner as they help you pay less interest.

Redraw is when you put your savings into your home loan account to reduce the loan balance (which in turn reduces the interest you pay). The money sits in redraw which means you can access the funds when you need them.

An offset accounts reduces the amount of interest you pay on your loan in a similar way, except the money sits in a separate bank account that is linked to your home loan.

For example, if you have $200,000 to pay on your home loan and you have $30,000 in redraw or in an offset account, interest will only be charged on $170,000.

The main differences between redraw and an offset account is that you have easier access to your money with an offset account as you typically have a debit card attached to the account. With some lenders you may also experience delays and fees when trying to take out money from redraw.

PS. These features are typically only available with variable rate loans, not fixed.

Review your rate

It’s a good idea to review your home loan rate every two to three years to make sure it’s still competitive. If it’s not, you can ask your bank for a better deal, or consider refinancing to a new lender. A lower interest rate can save you thousands of dollars over the course of your loan term.

Plus, a lower interest rate means lower repayments. This might free up cash to make extra repayments that help to pay off your loan principal more quickly.

Nook Money mortgage broker, Cat Denney, said: “So many people are getting slugged with the ‘lazy tax’. Essentially, they haven’t checked their mortgage in a while and are sitting on high interest rates when there are better deals available.”

“You don’t necessarily need to refinance to another lender to get a better rate. Lots of our clients use our free Nook Rate Review service to quickly benchmark and negotiate a better deal with their current lender,” said Cat.

“For example, a client of ours from North Curl Curl on Sydney’s Northern Beaches recently cut their home loan rate from 3.14% to 2.45% saving them $6,348 a year.”

Avoid interest only

When you have an interest-only loan, you aren’t reducing your loan balance. If you kept your loan as interest only forever, you would never actually pay it off.

For many property investors, there are tax benefits that mean interest-only loans can be beneficial in the short term. However, for the average owner-occupier home buyer, it just delays how quickly you pay off your loan. Paying both the principal (loan amount) and interest, will pay off your loan faster.

Work with your broker

Paying off your home loan faster isn’t difficult. It just requires some financial discipline and expertise in ensuring the right loan features are in place. Chat with your Nook Money mortgage broker to unpack your options.

Photo by cottonbro from Pexels

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