Buying a home is one of the biggest investments many people will make in their lifetime, and paying back a home loan is similarly one of the biggest commitments.
For people that want to pay off their loan and get out of debt faster, here are 10 easy tips and tricks to get the mortgage monkey off your back sooner.
- Beware of honeymoon or introductory rates
- Make extra repayments
- Pay fortnightly rather than monthly
- Get a packaged home loan
- Consolidate your debts
- Split your home loan
- Consider refinancing
- Use an offset account
- Make first home loan repayment at settlement
- Keep your repayments the same if interest rates fall
Many lenders will offer attractive introductory or ‘honeymoon’ fixed rates early on, only to switch to a higher variable interest rate once the initial period is over. It’s important to look out for this trap as after the period ends, which will usually only be for a few years, the variable rate is what will determine your repayments for the next 20 to 30 years. Plus, if you choose to switch to a better rate in the fixed-rate period, you might get hit with some hefty exit fees.
Essentially, look out for rates that might seem too good to be true. Make sure you know exactly what you’re signing up to for the long haul, not just the first few years. Ultimately, the rate you’re paying for the remainder will determine how much interest you pay overall.
A way to get ahead of your mortgage repayments is to make extra repayments in addition to your regular monthly repayment. Extra repayments made will go towards paying off the principal, rather than just covering the interest, which reduces the total amount you owe. As a general rule, the less principal you owe, the less interest you’re charged. This will both reduce the life of the loan, and the amount of interest you’re being charged. You typically aren’t able to make extra or lump sum payments during a fixed-term loan without breaking the contract, so double check if you’re able to do so.
Use our extra and lump sum calculator to calculate your extra repayments.
A simple yet effective strategy for paying off your loan faster is switching from monthly to fortnightly repayments. This is because there are 26 fortnights in a year, but only 12 months. So by paying fortnightly, you will be making the equivalent of 13 monthly payments every year instead of 12. This can end up chipping away at the principal and interest, therefore reducing the life of your loan.
Speak to your lender about the financial packages they have on offer. Common inclusions are discounted home insurance, fee-free credit cards, a free consultation with a financial adviser or even a fee-free transaction account. While these things may seem small beer compared to what you are paying on your home loan, every little bit counts and so you can use the little savings on other financial services to turn them into big savings on your home loan.
When interest rates rise, they don’t only affect your home loan. If you have any personal loans, car loans, or credit cards, you might see the rates on these forms of credit rise too. This can make it difficult to stay on top of all your debt.
If it seems like debt is piling on, you could consider consolidating (refinancing) all your debts into one streamlined repayment. This can be particularly helpful as interest rates on personal loans and credit cards will usually be considerably higher than your home loan rate. However, it’s important to double-check if there are any exit fees to break existing loan contracts, and how much you end up paying overall with all extra fees accounted for. Sometimes, debt consolidation doesn’t work out cheaper.
Interest rates are one of the biggest determiners of how much you end up paying back on your home loan. There are pros and cons to going for a fixed and variable interest rate home loan, so sometimes it can be difficult to decide which avenue to go down. A good compromise is a split loan, which allows you to split your home loan into a fixed and variable component. This way, you essentially get the best of both. So if interest rates rise, you’ll be secured by the fixed part of the loan. But if interest rates fall, you can capitalise on the lower rates using the variable side of things.
Finding a new lender with lower rates can end up slicing years off your loan and saving thousands in interest charges. However, you should look into what it will cost you to switch loans before jumping the gun. There could be exit fees payable on your current loan and establishment fees to switch to a new loan, so work out if it ends up cheaper overall to switch.
For borrowers that want to make extra repayments without all of their money going directly towards paying off their loan, an offset account might be the way to go.
An offset account is an account linked to your home loan. The funds that you deposit into an offset account are ‘offset’ against the loan, meaning you’re only charged interest on the difference between your loan balance and offset account balance.
To give you an example of how this would work, let’s say you have a home loan balance of $500,000. If you have $50,000 sitting in an offset account attached to your home loan, you will only be charged interest on the difference, which is $450,000. The more money sitting in your offset account, the less interest you’re charged.
This can be a good option if you would still like easy access to the funds if you ever need it on a rainy day. It can double as a savings account and be a way to reduce your mortgage length and interest charges. Make sure to try and opt for a 100% offset account - sometimes offset accounts won’t offset the total amount deposited, so it’s a good idea to check with your lender.
By making a repayment on the first day of your mortgage, you can reduce the principal immediately. This means you will be charged less in interest, straight away, which can help you get off on the right foot.
Though the beauty of a split loan is taking advantage of lower interest rates when they drop, this doesn’t necessarily mean lowering your repayment amount is the way to go. If you can, it can be good to keep making the same repayment amounts as you always have, even if interest rates fall. This way, you’re going to keep chipping away at the principal amount, resulting in less interest charged over time, which saves you both time and money.