Reducing the life of your loan isn’t difficult; there are many simple things you can do to cut years off your mortgage. Here are some tips that will help you be mortgage-free sooner.
Small extra repayments
One of the most obvious ways to pay off your home loan quicker is to make extra repayments. Depositing lump sums, such as a tax return or work bonus, will always be beneficial, however it doesn’t always take large amounts or windfalls to make a substantial difference – planning for regular, small cash injections can have a great impact over the life of a loan.
“Let’s say we add an extra $50 a fortnight on a $500,000 loan, that saves you $32,000 of interest over the life of the loan which in turn will save you just over two years. That’s about $25 a week.”
Switch your payment intervals
If you find that you don’t have the discipline to make extra repayments, then simply switching your payments can also help save years off your mortgage, as well as simplifying your finances if you are paid fortnightly.
“Because there are 12 months in a year but 26 fortnights, by switching your payment intervals from monthly to fortnightly, you are essentially paying off an extra month per year”.
Make sure you have the right type of loan
Ensuring your loan allows extra repayments without penalty will let you to make the most of bonuses or funnel small extra payments to reduce the loan principle more quickly, saving on interest immediately, while an offset account will use your savings or living expenses to reduce your principle, while still allowing you to access these funds from a transaction account.
“Often a loan split helps…with part fixed interest so you know the rate and repayments are “locked-in”, and part of the loan variable… which gives you a medium term target of something to pay-off. The variable loan also allows you to access all the flexibility of offset accounts or of making additional repayments which remain available for redraw if needed. Because loan interest is calculated ed daily but charged monthly, any money sitting in the account will help reduce the loan, further helping to shave years off your loan.”
Make sure you get a regular review of your loan
I review all my clients loans every year using a structured approach. This includes looking at the overall picture, and importantly ensuring the interest rate and features are still competitive. When I see a new client who has had the same loan for 5+ years it usually means they are paying about half a percent too much…which is thousands of dollars extra interest every year and years extra in loan repayments. Using a broker cost you nothing, but can save you thousands every year.
“I often say that the savings from the annual loan review is enough to pay for Christmas presents every year…and it’s you’re choice to give the pressies to your bank or to your kids!”
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.