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THE first few years of your home loan are the most important when it comes to making a significant dent to your mortgage.

Many borrowers often feel like they are treading water in the early days of the loan with repayments often chewed up by the interest charged at the end of each month.

But research from financial comparison site RateCity shows that paying down your home loan from day one is the key clearing your debt faster.

Paying $100 extra per month from the beginning on a $300,000 30-year loan with a standard variable rate of 5.65 per cent allows you to pay it off three years and 10 months earlier and you’ll save more than $48,400 in interest.

If your start making extra repayments five years into the loan you’ll pay it off two years and nine months earlier and save about $30,900 in interest.

RateCity spokeswoman Sally Tindall says it makes sense to start paying down your loan as early as possible.

‘Compound interest is your bank’s best friend so the harder and faster you fight against it the better off you’ll be,” she says.

‘Banks typically calculate interest daily which means that every time you put money in you’ll reduced the overall amount they can charge interest on.’

The Reserve Bank of Australia kept the cash rate on hold at two per cent this month and economists remain divided on whether they’ll be another rate cut this year.

ING Direct’s executive director of customers John Arnott says it’s vital customers understand the features of their loan to ‘set themselves up for early success.’

‘We often encourage customers to do things like credit their salary into their mortgage and leverage their offset facility,” he says.

‘In the first years of a loan the interest is going to be a greater proportion of the principal and the way to address that is to not necessarily set up your home loan to make the minimum repayments.’

Arnott says about 40 per cent of Australian home loan customers make more than the minimum repayments on their home loan.


Posted by Sophie Elsworth – Daily Telegraph on 12th February, 2016