What difference would it make to pay off your home loan faster, take control of your financial future, and become a homeowner sooner rather than later?
While home loans will be one of the most significant purchases you’ll make in your life, they don’t need to cripple you financially.
In fact, with a few simple tips and tricks for this financial year you can pay off your home loan ahead of time, and wake up in your own home before you know it.
While home loans generally involve a term of 25 years or 30 years, this doesn’t mean that you should be chipping away at your loan for such a long time.
These strategies could really help you to get ahead when it comes to your mortgage while saving you thousands when it comes to the overall interest you would have been charged.
Here is a list of five easy steps you can use to pay off your home faster.
You can use one, or if possible try them all. They will assist you in reaching financial freedom a lot earlier than expected.
Step One - Check That You Are Paying A Competitive Rate
If your current home loan is already on the expensive side when compared to the spectrum, you are already falling behind from the very start.
In a mortgage market that is highly contested, lenders at this stage are very keen to do business with you, which means it is very possible to find the best-priced home loans.
Chiropractor Keith Maitland, provides a tip for everyday Australians, having used this tip himself, he explains “most lenders provide the best deals to their new customers. So make sure you find out what is currently available from a range of lenders, or you could even try to negotiate a rate that is better with a current lender. Don’t think your first option is your only option.”
Step Two - Pay A Bit Extra Off On The Home Loan Every Month
If you make regular payments that are a bit more than the required amount every month, this will help you to pay your loan off much faster. In fact, you won’t need to pay a significant amount extra in order to enjoy valuable rewards. Paying even just one dollar more every day into the loan will mean you can own the home a lot sooner.
For example, if your home loan is $350,00 at an interest rate of 3.89%, paying $1 extra every day off the loan can translate into you becoming mortgage-free 8 months ahead of the proposed schedule, as well as lower your overall costs on interest by $5,500 or even more. If you are able to afford $2 extra every day, you could save up to $10,717 in interest, and cut out 15-months off your 25-year loan term. This result is amazing for under the cost of a cappuccino every day.
Step Three - Make Lump-Sum Payments Into Your Home Loan
If you receive any unbudgeted lump sums of money every year, such as a work bonus or tax refund, these are very handy windfalls of money that you can use to contribute towards your home loan.
This is the type of money that you have already learned how to live without, and the chances are high that you won’t be missing what you never had anyway. Even better, using lump-sum payments towards your loan can significantly accelerate a reduction in your loan as the cash will come directly off the balance of the loan.
Using the same $350,000 home loan that we mentioned earlier if you use a $2,000 tax refund towards your home loan, you can cut back 3 months from the overall loan term, as well as save as much as $3,000 in interest. This is a fantastic way to make your money stretch further.
A quick tip from entrepreneur Fiona King, “if you make it a habit every year and you pay any lump sums into the loan, this will supersize your savings on interest. A simple change for a major result.”
Step Four - Make Your Loan Repayments Every Two Weeks
Instead of making regular monthly payments, pay half the amount due every fortnight. Over one year, you would have made 26 repayments. This is the same as 13 monthly payments, rather than 12 monthly payments expected from the lender. This means you are making an extra repayment every year without impacting significantly on your cash flow.
However, this strategy is only successful if the lender is open to weekly payments rather than monthly.
Step Five - Think About A Home Loan Offset Account
Home Loan Offset accounts are basically a type of transaction or savings account attached to the home loan. Instead of getting paid separate (and fully taxable) interest on any of your savings, the cash value in your offset account will be deducted off the balance of the home loan with the interest calculated on this difference.
Here is a guide, if your home loan is $400,000 and you have savings of $20,000 in an offset account, the interest will then be worked out on a loan amount of $380,000. This will reduce your interest costs monthly, yet because the regular repayments remain the same, this means more of every payment is going towards paying your loan principal.
According to the bookkeeping experts at Robinson Accounting “the offset accounts happen to be a more tax-friendly way to use your savings, while at the same time saving more on the interest of the home loan than you would have earned on separate savings accounts. Any spare cash is available, which makes the home-loan offset more convenient in comparison to redraw. Yet it might take a bit of discipline and restraint to not dip into this linked account.”
Are you ready to pay off your home loan sooner?
In conclusion, there are many advantages to paying a home loan off as fast as you can. It usually means that you will have more money for yourself eventually, and worry less about any rate hikes.
The best part is that you will own your home outright, without having to answer to your lender, and this is the best feeling ever.
Looking for some help paying off your home loan sooner? Speak to a member of our friendly and experienced team today!
Jack Poole is an Australian writer and business student living in Sydney. He is extensively knowledgeable in financial-related topics. Jack has a passion for the arts. When he’s not studying or writing, you’ll find him frequenting the art museum.
Disclaimer: This article provides general information only and may not reflect the publisher’s opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher’s prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.