When it comes to paying off your home loan, time is key to reducing the amount of interest you pay, as well as ultimately reducing the life of your loan.
While buying a home of your own is the dream for most of us it also comes with the long term financial commitment of paying a mortgage, in many cases up to 30 years. There are however, some things we can do to reduce the length of the loan as well as the amount of interest we pay back to the lender. Small adjustments in our lifestyle or what might seem like minor extra contributions may look insignificant at first glance, but hold great long-term financial benefits.
There are a few simple things you can do to pay off your home loan faster…
Adjust your home loan repayments to align with your salary
Set up your home loan repayments to be the same frequency your salary is paid into your bank account. So, instead of paying your mortgage every month, change it to every fortnight if that’s when you receive your regular income. Lender repayments are often set to monthly by default, however if you change this to fortnightly you will reduce the balance of your loan 14 days earlier each month (because you will already pay half of what you had planned to pay every month, in the middle of the month). This means less interest being charged as your total loan reduces faster. Even better, make your repayments weekly! In the long term, this will greatly reduce the interest you pay, which flows on to reducing the total time it will take you to finish paying your off your mortgage.
Use extra income to reduce your debt
If you receive an extra income, consider using it to reduce your mortgage debt. For example, if you receive personal investment earnings, bonds from the company where you work, tax refunds or any other extra income or unexpected financial windfalls, consider how it could reduce your balance, the interest you pay and the time it will take to pay off your mortgage.
Offset your loan with a savings account
Using a savings account to offset your home loan allows you to reduce the interest you pay on your loan. You simply do not pay interest on the amount of savings you have sitting in your offset account. This means if your loan is $500,000 and you have an offset savings account with $50,000, you will only be paying interest on a total of $450,000. Projected over 20-30 years, this can save you thousands of dollars.
Keep your mortgage repayments the same even when interest rates drop
Resist the temptation to reduce your mortgage repayments when banks reduce their interest rates. While this may present an opportunity to save some cash in the short term, it presents a better opportunity to save you far more in the long term. If you can afford your repayments, leave them as they are, you will not only pay off your loan earlier than planned (sometimes years), but you will again reduce the amount you pay back to the lender in interest. In the case of your personal finances get better, it is equally beneficial to increase your payments proportionate to your income as any increase will have a significantly positive effect on reducing your debt over time.
Review your home loan conditions regularly
The conditions of the property market and your personal life constantly change. Over time, there will likely be alternative home loan options that better suit your needs as your life and priorities shift. Research your options and every so often consider refinancing your loan with the same or a new lender to take advantage of new deals, lower interest rates or to mitigate the negative effect a change in your personal life or the property market could have on your personal circumstances.
We are here to chat if you want to know more about how to pay off your home loan faster! Give us a call on 1800 3 PEASY or contact us on hello@peasy.com.au