Over the last couple of years, Australian home loan interest rates have been at historic lows. With interest rates expected to rise in the future, here are some extra steps that can help you pay your home loan faster.
Seek out lower interest rates
One of the easiest ways to reduce the loan term is to reduce your interest rate. Many borrowers take out a mortgage and then stop following the home loan market. With interest rates constantly changing, and banks offering special deals and cashbacks to win new customers, it pays to monitor the latest rates and check to see if you can bet a better deal on your loan.
Make higher repayments
The minimum repayments required on a loan are calculated on the amount owing and the prevailing home loan interest rate. By repaying more than the minimum, especially during the early years, you are paying more off the original loan principal thereby reducing the overall term of the loan and saving you thousands of dollars in interest. A mortgage repayments calculator will quickly show what savings can be achieved.
By paying extra in your variable rate home loan, you will also have the advantage in obtaining access to these funds through a Redraw facility. So if you want somewhere to “park” your extra funds in the short term, putting them into your loan and then redrawing them when required, will help to reduce interest charged in the short term.
With fixed rate loans, you usually will be restricted by the lender in paying extra off your loan plus there is no redraw available. So make sure that you check the T&C’s before making any additional repayments.
Make more frequent repayments
Home loans are often structured so that you make monthly repayments. However interest is calculated on a daily basis. By making fortnightly repayments you are reducing the loan principal earlier and also making the equivalent of one extra monthly repayment per year. The extra repayments will ensure the loan balance is lower at the time of the month the interest is calculated, thereby generating long term savings in interest charged.
If you receive your pay monthly, you can have the same effect by effectively making an extra repayment upfront.
Use an interest offset account
Some lenders allow you to link a variable rate mortgage with an interest offset account. An offset account allows you to reduce the amount of interest paid on your loan by offsetting the amount in the offset deposit account against your loan balance. Unless you hold significant deposits, you won’t make large savings by using an offset account, however every dollar saved in interest will help over the long term. So if you do have a Offset account linked to the loan, make sure that you are using it to your best advantage.
Don’t take the rate cut
If you have refinanced or negotiated a lower rate on your home loan, your first thought may be to reduce your loan repayments accordingly. However, by maintaining the same loan repayment, you effectively repay more off the loan balance. Remember, in a variable rate loan these extra repayments will be available for redraw so you can access these funds should you need them in the future.
Pay both principal and interest
While you can make lower repayments by choosing an interest-only loan or line of credit facility, doing so means the principal component of the loan will not be repaid while you are only paying interest. Furthermore, most interest only loans attract a higher interest rate so converting them to P&I basis will save you interest and reduce the term of the loan.
Pay fees upfront
When initially taking out a mortgage, lenders will often roll the establishment costs and charges into the loan. While this may help the short-term budget, it’s worth paying these costs separately to lower the overall balance of the loan from the start.
Set up a split loan
A split loan, sometimes referred to as a combination loan, enables borrowers to divide their mortgage into both variable and fixed components. By doing this, you lock in a fixed rate but maintain the flexibility on the variable component. This is a way of hedging your overall exposure to any future interest rate rise. However as you will most likely be paying a higher rate upfront with a fixed rate loan and potential high costs for early payment, you will need to check to see if this structure fits your personal situation.