Author: Melanie Tesoriero
Typically, when you take out a home loan, you are given a period of 25 or 30 years to pay it off. But that doesn’t necessarily mean you have to chip away at your mortgage for that long. These five strategies could help you get ahead on your mortgage, and save you a significant amount of money on interest charges in the process.
1. Check you’re paying a competitive rate
At the time of writing, there’s over a 1.95% difference between the highest and lowest home loan comparison rates on Canstar’s NZ database. And if your home loan is at the expensive end of the spectrum, you could be behind the eight ball from the start.
In a hotly contested mortgage market, lenders are usually keen for business. So presuming you are seen to be a good candidate (such as having a good credit rating and the means to meet repayments), you may be very eligible for a more competitively priced home loan interest rate.
The thing is, many lenders save their best deals for new customers. So don’t be afraid to check out what’s available elsewhere, or to negotiate a better home loan rate with your current lender.
2. If you can, pay a little extra off your home loan each month
Regularly paying a bit more off your loan is a simple way you may be able to pay off your home loan faster. And you don’t have to pay a lot extra to potentially reap valuable rewards. Paying just a dollar a day more into your loan could help you pay it off months earlier.
As an example, on a 25-year home loan of $350,000 with a rate of 3.89%, paying $1 a day extra above the minimum repayment off your loan could see you become mortgage-free up to eight months ahead of schedule – plus cut the overall interest costs by as much as $5500. Make it $2 a day extra and you could save $10,717 in total interest and cut 15 months from that 25-year loan term.
This is not a bad result for less than the price of a daily latte! However, check with your mortgage provider to determine whether you’ll need to pay any fees for making extra repayments, or for the early termination of your mortgage, and factor these into your calculations.
Canstar’s mortgage calculator can show you how making extra repayments can help you pay off your loan sooner.
3. Make lump sum payments into your home loan
Do you receive an unbudgeted lump sum of cash each year, like a tax refund or work bonus? These windfalls are a handy source of cash that could help you pay off your home loan sooner.
It’s likely money you’ve learned to live without. If that’s the case, chances are you won’t miss it if you stash it away. Using a windfall to make a lump sum payment on your home loan (or in an offset account – more on that later) could dramatically accelerate a loan reduction, because the money comes straight off the loan balance.
On the same $350,000 home loan mentioned earlier. If you make minimum repayments but use a $2000 tax refund to make a lump sum repayment, it could cut up to three months from the loan term and save over $3000 in interest. It’s a great way to get more bang for your buck.
If possible, make lump-sum mortgage repayments a yearly habit to really supersize your interest savings. However, again, it pays to check with your lender whether any fees or restrictions apply.
4. Make your loan repayments fortnightly
If making extra repayments isn’t an option, you could try paying more frequently.
Rather than making repayments monthly, you could aim to pay half your regular repayment each fortnight. Over the course of a year, you’ll make 26 repayments. That’s equal to 13 regular monthly payments, instead of the 12 monthly repayments your lender typically requires. So you’ll make one month’s extra repayment each year without too much impact on your hip pocket.
Do note, the success of this strategy can depend on how your lender treats monthly versus weekly repayments.
5. Consider a home loan offset account
A home loan offset account is basically a savings or transaction account attached to your home loan. Instead of being paid separate interest on your savings, the value of any cash in an offset account is instead deducted from your home loan balance, with interest calculated on the difference.
As an example, if you have a home loan of $400,000 and savings of $20,000 in a 100% offset account, the interest you pay will be based on a loan of $380,000. This can reduce your monthly interest costs, meaning if your regular repayments stay the same, more of each payment goes towards paying down the loan principal, which can help to pay off your home loan sooner.
Offset accounts can be a savvy way to make your savings work for you. This is because you’ll normally save more in home loan interest than you’d earn on a separate savings account.
Your spare cash in an offset account is usually still accessible, though it can take some discipline to avoid dipping into the linked account. You can achieve a similar result if your home loan provider offers a redraw facility, though check for any fees or time delays that may apply to accessing the money.
Note that home loan packages that include offset accounts or redraw facilities are based on variable interest rates, not fixed. As variable interest rates are usually higher than fixed rates, you must take this into consideration when deciding if it’s the right option for you.
The bottom line
The bottom line is there are a lot of reasons why paying off your home loan sooner, if you are able, can be a positive move. It can leave more cash in your pocket over time and lead to fewer worries about rate hikes.
Best of all, you’ll own your place outright without a lender to answer to, and for many there’s arguably no better feeling. It’s a good idea to check with your mortgage provider to determine whether there are any fees involved in any of the above strategies and to do your own calculations. You could also consider speaking to a financial adviser for more personalised advice.
Want to save money on your mortgage? Canstar can help
One of the easiest ways to reduce the cost of buying a home is to ensure that you secure the lowest mortgage rate. And this is something Canstar can help you with, thanks to our free and easy-to-use comparison tools. For our five-star home loan awards click here, or to compare rates hit this button:
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