Strategies to Pay Off Your Home Loan Faster: Save Money and Build Equity.
Paying off your home loan faster is a smart financial move that can save you thousands of dollars in interest and help you build equity in your property more quickly. While it may seem daunting, there are several effective strategies you can employ to accelerate your loan repayment. Let’s explore these methods and how they can benefit your financial future.
1. Making Extra Repayments
One of the most straightforward ways to pay off your loan faster is by making additional repayments whenever possible.
Benefits:
- Reduces the principal balance faster
- Decreases the total interest paid over the life of the loan
- Shortens the loan term
How to implement:
- Allocate windfalls (tax returns, bonuses, inheritances) to your mortgage
- Set up automatic extra payments, even if they’re small
- Round up your regular payments to the nearest hundred
Remember, even small additional payments can make a significant difference over time.
2. Increasing Repayment Frequency
Changing your repayment schedule from monthly to fortnightly or weekly can help you pay off your loan faster without drastically changing your budget.
Benefits:
- You make the equivalent of one extra monthly payment per year
- Reduces the principal balance more frequently, lowering the interest charged
How it works:
- Instead of 12 monthly payments, you make 26 fortnightly or 52 weekly payments
- Each payment is half or a quarter of the monthly amount, respectively
This strategy works because there are 26 fortnights or 52 weeks in a year, compared to 12 months.
3. Utilizing Offset Accounts
An offset account is a savings or transaction account linked to your home loan that can significantly reduce the interest charged on your mortgage.
Benefits:
- Reduces the interest calculated on your loan
- Maintains access to your funds for emergencies or other expenses
- Potential tax advantages compared to earning interest in a savings account
How it works:
- The balance in your offset account is subtracted from your loan balance when calculating interest
- For example, if you have a $400,000 loan and $50,000 in your offset account, you’ll only pay interest on $350,000
4. Using the Redraw Feature
Most variable rate loans come with a redraw feature, allowing you to access extra funds you’ve paid into your loan.
Benefits:
- Encourages you to put extra money into your loan, knowing you can access it if needed
- Reduces the interest calculated on your loan while the extra funds are in the account
- Provides flexibility in managing your finances
How to use it effectively:
- Treat your loan account as your savings account
- Keep all excess funds in your loan account to reduce interest
- Only redraw when absolutely necessary
Combining Strategies for Maximum Impact
While each of these strategies can be effective on its own, combining them can lead to even greater savings and faster loan repayment. For example:
- Make fortnightly payments and round them up to the nearest hundred
- Use an offset account for your savings and emergency fund
- Make lump-sum extra payments whenever possible, using the redraw feature for peace of mind
The Role of Your Mortgage Broker
Your mortgage broker can be an invaluable resource in implementing these strategies. They can:
- Help you understand which strategies are available with your current loan
- Calculate the potential savings from different repayment strategies
- Advise on whether refinancing to a loan with better features (like an offset account) could be beneficial
- Assist in setting up new repayment schedules or features with your lender
Considerations Before Implementing These Strategies
While these strategies can be highly effective, it’s important to consider your overall financial situation:
- Emergency Fund: Ensure you maintain an adequate emergency fund before directing all extra funds to your mortgage.
- High-Interest Debts: Consider paying off high-interest debts (like credit cards) before focusing on extra mortgage repayments.
- Investment Opportunities: Weigh the benefits of extra mortgage repayments against potential returns from other investments.
- Loan Terms: Check if your loan has any restrictions on extra repayments or offset accounts.
Conclusion
Paying off your home loan faster is an achievable goal with the right strategies and commitment. By making extra repayments, increasing your repayment frequency, utilising offset accounts, and making smart use of the redraw feature, you can significantly reduce the interest you pay and shorten your loan term.Remember, every situation is unique, and what works best for one borrower may not be ideal for another. That’s why it’s crucial to discuss these strategies with your mortgage broker. They can provide personalised advice based on your specific loan terms, financial situation, and long-term goals.By taking proactive steps to manage your mortgage more effectively, you’re not just saving money – you’re building a stronger financial future and moving closer to the day when you own your home outright. Start implementing these strategies today, and watch as your mortgage balance decreases faster than you ever thought possible.
