Most of us are willing to take out a 25-30 year mortgage in the knowledge that we’ll one day own our own home. But just because the loan paperwork gives you 25 years, doesn’t mean it’s time to sit back and just make the minimum repayments. It’s in your interest to pay off your loan faster and you’d be surprised by some of the simple things you can do that will make a big difference, starting with…
1. The little things (budget appropriately)
Take a good look at your monthly spending. You need to enjoy life as well as paying off your home loan but could you cut back on those soy lattes or Thai take-outs? Even small extra repayments can make a huge difference in the long run.
Here’s a great example: say you have a $300,000 home loan over 25 years (with an ongoing interest rate of 7.25%), by putting an extra $50 a month into your loan – that’s one less Pad Thai per week – you can save over $27,000 in interest.
2. Stay repayment friendly
Yep, interest rate cuts are very welcome but if you are able to keep up the old repayment level you’ll shave a chunk off the principal of your home loan much faster.
3. Bump up repayments
Currently repaying your mortgage monthly? You can make significant savings on your home loan by switching to fortnightly repayments.
4. Look into an offset account
Make your everyday money work hard for you by helping to reduced the interest you are charged on your home loan. An offset account is just like any other transaction account, where you can deposit as much money as you please and you can access the money to pay for your everyday needs.
How it works: The balance in the account is offset against the principal of the home loan and you only have to pay interest on the net balance. For example, a home loan of $400,000, with an offset account balance of $30,000, will only have interest on $370,000.
5. Consolidate your loans (car loans, credit cards)
If you’re paying off a car loan or credit card as well as your home loan, consolidating the higher interest loans into your home loan can make sense and save you on interest. But only if you keep up the same level of repayments. Don’t fall into the trap of consolidating and then making lower repayments over a much longer period of time.
6. Look outside the Big 4
You may have grown up using a Commonwealth Dollarmites savings account but don’t get stuck in the routine of using the same big bank. The home loan market is extremely competitive and you may be missing out on, really much better, competitive interest rates and home loans that smaller banks (specialist lenders and credit unions) offer.
7. Pay upfront charges…upfront
It may seem so easy to just wrap any upfront charges such as establishment fees, legal fees and mortgage insurance into your home loan. However, paying these off immediately will save you on interest and cut the length of your mortgage significantly.
8. Always look to the future
Don’t be complacent and obediently pay off your home loan over the 25 year term. Every year give your home loan a health check to make sure you’re still getting the best deal. It will take less than 5 minutes and you’ll get an idea of the best rates so that you can either go back to your current lender and negotiate or switch to a better loan.