When you take out a home loan, you’ll generally make mortgage repayments with the expectation of paying the loan out within 25-35 years. That doesn’t mean you can’t pay it back sooner, however! In today’s blog, Hatch Financial Services’ Director Tim Gaspar shares his top tips on paying down your home loan faster.
Lengthy stints at University interspersed with overseas travel and a hot property market are just a few of the factors contributing to people entering the property market later in life. Buy your home before you’re 30 and you’re still faced with the reality of paying down your mortgage for the majority of your working life. Want to pay it off sooner? Don’t let your repayment period of 30 years slow you down; paying more on your loan than you are committed to saves you thousands of dollars in interest. Here’s some practical ways to diminish your mortgage, pronto.
Use Extra Income to Make Additional Repayments
If your income goes up (whether temporarily or permanently), up the ante on your home loan repayments before splurging on your lifestyle. While you might see a cash windfall as an opportunity to indulge on the finer things, try to set some of your spoils aside for your home loan. Making small additional repayments when you’ve come into extra money means you’ll ultimately make additional mortgage repayments unconsciously. Paying just $100 extra per week on a $500k home loan with a 4% interest rate will cut the term of your loan by almost 8 years!
Back to The Future
My favorite top tip is to pay off your loan as if interest rates were 3% higher than they really are. Not only does doing so you protect yourself from ‘rate shock’ if interest rates do rise, you’ll pay down your loan substantially faster. It’s an incredibly smart move. Paying that same $500k home loan at 7% instead of 4% would cut your loan term by almost half, seeing you pay down your full balance in under 18 years.
Make Payments More Often
Paying your home loan off in weekly or fortnightly instalments saves you interest and pays down more of your principal per year than monthly repayments. That’s because you’ll pay as though there’s 13 months of the year instead of 12. It’s a great way of making an extra repayment without realising it!
Use an Offset Account
If you’re currently unable to make additional repayments each month, open an offset account and stash any savings you can afford in there. You can access these funds quickly and easily if you need, but the lump sum ‘offsets’ the amount of interest you pay on your remaining balance. For example, if you have $200,000 left on your loan and you’re paying 4% interest, you’ll pay $8,000 a year in interest. If you put $20,000 in an offset account, you’ll save $800 a year in interest payments alone.
Don’t Splurge Unexpected Cash
Got a tax return, work bonus or a generous gift from a family member? Pay some or all of the windfall off your home loan. While it’s tempting to treat yourself, the head start on your home loan will be worth it in the long run.
Keep On Top of Your Loan Structure
Always ensure that your loan is structured to suit your individual circumstances. Rolling onto a standard variable rate at the end of a fixed term or failing to take advantage of offers available could cost you in dollars and years of repayments. While it might seem like an admin hassle at the time, saving a few percent on your interest rate will make all the difference.
When attempting to pay down your mortgage sooner, the important thing to remember is: balance is everything. Not only the balance on your home loan, but balance in your lifestyle. I’m not suggesting you go without life’s simple pleasures for all eternity just to pay off your home loan. Rather, I recommend you make small budgetary changes and work on adopting good saving habits – every little helps.