Regardless of whether your home loan is for your own place of residence or an investment property, all homeowners have one thing in common – the desire to pay the home loan off as soon as possible to be debt free. Luckily there are a few easy steps to follow which will help you to pay your loan off faster and potentially save you thousands of dollars in the process.
Author: Don Crellin, General Manager, Resolve Finance.
Always pay Principal and Interest
Firstly, it is important to understand how your home loan works. Your minimum monthly loan repayment is calculated on how much per month is needed to pay off the balance of the loan or principal over the term of the loan, plus the interest that has been accrued on that balance. This is called ‘Principal and Interest’ and should be the minimum you pay off your loan for your place of residence each month. If you have an ‘Interest Only’ loan you are only repaying the interest component and will never repay your loan so you should definitely avoid this option if you want to get ahead.
However, if you are paying off your own home, plus an investment property, you may find that paying Principal and Interest (P&I) is not the best solution for you because you may get some tax benefits on your investment property but not on your own home. Therefore, it may make sense to pay off your home as quickly as possible while maintaining the tax benefits on your investment property.
You can do this by paying P&I on your home loan and interest only on your investment property. It is important to speak to your financial consultant or broker to understand which scenario is best suited to you.
Reduce your loan term but give yourself flexibility
Normal loan terms are generally around 25 years but they can be as short or long as you want. Obviously the quicker you pay it off, the less interest you pay, so you are recommended to always pay off as much as you can afford to, as quickly as you can. However, even if you think you can pay your loan off quicker than the standard 25 year term, it is always a good idea to take out a loan for the full term to give yourself as much flexibility as possible.
Make repayments weekly or fortnightly, rather than monthly
What some people don’t realise, if that you can actually save yourself interest over the life of your loan by paying your repayments weekly or fortnightly, rather than monthly, as the interest is calculated on the reduced total so you are better off to reducing it as often as possible!
Make a lump sum payment to reduce your loan
If possible, you are also recommended to make one-off lump sum payments whenever you can to reduce your mortgage and the total from which your interest is calculated. Even if you have to redraw some of this lump sum payment down the track for other commitments, it has provided you with a short term benefit by reducing your loan and the amount of interest you will repay.
Make sure you have a redraw facility
It is also a good idea to have a redraw facility which allows you to apply extra repayments to your loan, reducing the balance, which remains accessible for withdrawal if required. This will reduce your mortgage but is important to make sure there are no fees associated with your redraw facility in the event you do wish to redraw some of the additional funds.
Use an offset account
In addition, you may also wish to speak to your lender about establishing an offset account. This account can be used as your general ‘day to day’ account but any surplus funds sitting in this account are used to offset your home loan and will be deducted from the balance of your home loan, thus reducing the amount you owe. Offset accounts can be used for a wide range of things including multiple incomes or even as a holding account for GST if you are self-employed!
Sure, the balance of this offset account will fluctuate but even if there is only a small amount in there, every little bit helps and you will be surprised how these little things can really add up over the life of a 25 year loan!
Use your online resources
Finally, play around with the various online resources available to you to find out how these tips and suggestions can save you money. The quickest and easiest way to test different repayment scenarios is to jump on the Resolve Finance website and check out the different calculators which will show you how you can pay off your mortgage faster. The calculators will show you how much time and interest you will save if you pay Principal and Interest; how much you will save if you decide to pay a lump sum off your home loan at any given time; how much quicker you can pay off your mortgage if you choose to make extra repayments on a regular basis; or how different interest rates over different time frames can affect how much you repay.
There are many options to consider to reduce your mortgage repayments and a qualified mortgage broker, such as Resolve Finance, can help you find a solution.
Visit www.resolvefinance.com.au today to discover how you can reduce your mortgage faster.
Resolve are an award winning brokerage with over 14 years’ experience in helping property investors set up and secure the right loan for their situation. As number 9 in The Advisor magazines Top 25 Brokerages, they know precisely what’s needed and when, and can coordinate it all for you. For more information on this topic please visit Resolve Finance at www.resolvefinance.com.au.
DISCLAIMER: This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.