Every homeowner dreams of the glorious day that they make their final payment on their home loan. We show you how to inch a few steps closer.
Australian householders are saving more money than ever before in the wake of the GFC, with savings accounts bloating to their highest levels in more than two decades.
“Today’s household savings have reached 10.7% of disposable income – the most in 24 years,” says Mortgage Choice spokesperson Kristy Sheppard.
“The problem for many mortgage holders is knowing how to best put these savings to good use. For example, did you know if you put a lump sum of $2,000 into a 7%, $300,000 home loan, at five years into a 30-year loan term, you will save almost $10,000 in interest and five months off your term?”
Many people simply pay the minimum amount off their mortgage each month, but Sheppard says paying even a small amount, like an extra $25 a week, can really add up in the long term.
After all, $25 per week equates to $1,300 annually, so if you do that every year you’ll be well on your way to trimming your loan term and your long-term repayments.
“There are many advantages to repaying your mortgage quickly. Not only will you own your home sooner, but you can also avoid hefty interest payments,” she says.
“You may be able to access built up equity to use as a security to upgrade your home, or purchase an investment property.”
Sheppard offers these top tips to help you reduce your mortgage debt and own your home even sooner:
1. Repay your mortgage more often
By making fortnightly repayments equal to half your minimum monthly repayment, you pay one extra monthly repayment each year. For example, if your monthly mortgage is $2,100 per month, pay $1,050 each fortnight. You’ll end up making 26 payments of $1,050 ($27,300) instead of 12 payments of $2,100 ($25,200) across the year, which will help you pay off the principal debt more quickly.
2. Contribute lump sums
This reduces the amount of interest you owe and the overall loan term. If you put your tax return of $1,000 into a $300,000 loan (at 7% over 30 years) at year one in, it reduces the term by one month and the interest owed by just over $2,360. Think about doing so annually.
3. Build a financial buffer
Home loans with offset accounts give you the best of both worlds, because you can link a savings account to your loan and ‘offset’ (use) that amount to reduce the interest owed. If you kept $5,000 in an offset account, on the above-mentioned mortgage, the loan term would be reduced by almost two years and you would save over $33,000.
4. Don’t be late on repayments
Dodge additional accruing interest, by scheduling automatic home loan repayments that come out, say, the day after you get paid. This way, you’ll never forget a payment and you’ll never fall behind on your loan, which also helps to keep your credit score in check.