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 this long.
These five strategies could help you get ahead on your mortgage, which could save you a significant amount of money on interest charges in the process:
1. Check you’re paying a competitive rate
At time of writing, Canstar’s data shows there’s a 1.95% gap between the highest and lowest home loan comparison rates on Canstar’s database. So 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 offer their best deals for new customers. So don’t be afraid to check out what’s available elsewhere, or to try to negotiate a better home loan rate with your current lender.
Best Home Loan Rates for Refinancing
The table below displays some of the 2-year fixed-rate home loans on our database (some may have links to lenders’ websites) that are available for home owners looking to refinance. This table is sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Products shown are principal and interest home loans available for a loan amount of $500K in Auckland. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products. Canstar may earn a fee for referrals.
2. If you can, pay a little extra off your home loan each month
Regularly paying off a bit more from your mortgage is a simple way to clear 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 a hypothetical example, on a 25-year home loan of $350,000 with a rate of 3.89% for instance, paying off $1 a day extra above the minimum repayment of your loan could see you become mortgage free up to eight months ahead of schedule, and cut the overall interest cost 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 the 25-year loan term. Not a bad result for less than the price of a daily coffee! However, check with your mortgage provider to determine whether you will need to pay any fees for making extra repayments, or for the early termination of your mortgage, and factor these into your own calculations.
Canstar’s mortgage calculator can show you how making extra repayments could 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 over the year and, if so, chances are you won’t miss it. 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 above, if you make the minimum repayments but use a $2000 tax refund to make a lump sum repayment on your loan, you could cut up to three months from the loan term, plus save over $3000 in interest.
You could consider making it an annual habit to pay lump sums into your loan to supersize your interest savings. However, again 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 will typically ask for. 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 earning separate interest, 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 could in turn help you pay off your home loan sooner.
Offset accounts can be a savvy way to make your savings work for you, as you’ll normally save more in home loan interest than you’d likely 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, some home loan packages that include offset accounts or redraw facilities may charge higher fees and rates than packages that do not include these features, so it’s a good idea to take this into consideration when comparing.
→Related article: Offset Mortgage or a Revolving Credit Account: Which is Better?
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 could 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.
But remember 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 can also consider speaking with a financial adviser for more personalised advice.
About the reviewer of this page
This report was reviewed by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.