Getting into your dream home or climbing the property ladder is great. Having the home loan that goes with it? Not as fun.
From the day we get a new home loan we’re all really focused on one thing – paying it off. FAST.
So, what can you do to pay off your home loan faster? Check out our top 7 tips below.
The basics
Even with interest rates as low as they are right now, home loans are still massive financial investments, and they can cost a lot.
A $400,000 home loan with a rate of 3.00% p.a. will have monthly repayments of $1,686 and end up costing you $207,110 in interest costs over the 30-year life of the loan (plus obviously repaying the original $400,000)1. Let’s call this our ‘base case example’.
Now that’s a big number (and unfortunately, it’s not possible to make it $0) but there’s a lot you can do to pay less, and to pay off your home loan sooner.
Tip 1: Get a lower interest rate
Well, duh!
We all know the lower the interest rate, the less we pay. But does it really make that much of a difference? Simply put, yes. Yes, it does.
Let’s take our base case example above and reduce the interest rate by 0.50% p.a.
This would reduce the interest costs by $38,136 over the 30-year life of your loan and reduce your minimum repayments by $106 a month. Nice.
Wow, it certainly makes a difference.
But can you really save 0.50% p.a. on your interest rate? Many people can.
In fact, according to data published by the Reserve Bank of Australia (RBA), the weighted average interest rate in Jan 2021 for ALL current Owner-Occupied home loans was 3.02% p.a. whereas NEW loans that month had a weighted average rate of 2.51% p.a. (a difference of 0.51%)2.
Tip 2: When your rate drops, keep up your repayments
So, let’s imagine you’ve just reduced your home loan rate (woo!)! Happy days!
As a result of your lower rate, your minimum repayment amount has come down too. Using our example above you would have an extra $106 a month in your pocket if you chose to keep those savings for yourself.
But what if you kept your repayments at the same level as before? That is, what if you put that extra $106 a month towards your loan?
This would reduce the interest costs of your loan by $15,530 over the life of your loan and also cuts a full 3 years off the life of your loan. Sweet.
Now we’re up to saving $53k of interest costs and cutting 3 years off your loan. Making progress!
Tip 3: Split your monthly repayment into fortnightly
More often than not, your loan will be set up with monthly repayments as the default.
But what would happen if you took your monthly repayments, split it in half and paid that every fortnight. So instead of paying $1,686 a month you paid $843 every 2 weeks.
The difference is BIG. Using the base case example, it would save you $27,517 over the life of your loan in interest costs and reduce the length of your loan by over 3 years.
How does it work? Simply put, you’re making one extra monthly repayment each year. Because instead of making 12x monthly repayments, you’re now making 26x fortnightly repayments each year which is equal to 13x monthly repayments. Just check with your lender whether a fee applies for making extra repayments.
Tip 4: Maximise your offset and redraw
An offset account can be attractive. A 100% offset account reduces the interest you pay on your home loan as interest is charged on the “net” balance you owe, not your whole home loan balance (net balance = home loan balance owing – offset account balance).
Paying less interest sounds logical, but is it worth it?
Let’s say you had $10,000 set aside as your emergency fund, holiday fund or splurge account and it’s sitting in a transaction account earning no interest.
If you had that money sitting in an offset account linked to your home loan instead, this would reduce the interest costs in the base case example by $14,162 over the life of your loan and also cuts one full year off the life of your loan.
Tip 5: Beware of other debt
While you’re focused on repaying your home loan, there might be times where you’re tempted to take out other types of loans for different reasons like a loan for a holiday, car or simply credit card debt.
Home loan interest rates are usually much lower than credit card and personal loan rates.
Interest on a $5,000 loan costs $1,000 per year at 20% p.a. interest (like a high interest credit card), $500 a year at 10% p.a. interest (like a low rate card or unsecured personal loan) or $150 at 3% p.a. interest (like your home loan).
Now a personal loan might be a good way to make sure you pay down your debt faster as loan terms are normally shorter. But if you can pay off $150 in interest per year instead of $500, it is worth considering whether a different (and higher rate) loan is really the best option for you.
Tip 6: Don’t get caught out by fees
We’ve talked a lot about interest rates, and we should, it clearly makes a big difference.
But while you’ve got your eye on the main prize, don’t get caught out by fees. On average an Australian household with a home loan, credit card and savings account pays over $600 in bank fees each year. YUCK!
That’s $18,000 in bank fees over the 30 years of your home loan. Whoa.
Plus if you used that money to pay off your loan instead each month, you could save an extra $9,800 in interest on top of the $18k over the 30 year life of your loan.
Lucky for you Finspo is able to track your banking fees and alert you if you’ve been charged.
Tip 7: Every dollar counts
At Finspo, we’re really focused on helping reduce the cost of your home loan before you start to cut back on the things in life you really like.
But, it’s important to remember that every dollar counts.
Even putting an extra $1 a day towards your home loan ($30 a month) can save almost $6,000 in interest costs over the life of your loan and cut a year off your home loan compared to the base case example above.
So if you do have a subscription you don’t need or a gym membership you don’t use, that money could be helping you pay off your home loan sooner. Just check with your lender whether a fee applies for making extra repayments.
So there they are, our top 7 tips to help you pay off your home loan faster. And if you’re now thinking it’s time to act, we’re ready to help.
Our Finspo home loan experts are ready to help with your loan, so book a time now.
Finspo ABN 34 637 821 928 Australian Credit Licence 521120.
Things you need to know: This information is general only and is not intended to include any recommendation or suggestion about any particular credit product. It does not take into account your financial situation, requirements, and objectives. Please consider whether this information is right for you before making any decisions and seek professional tax or financial advice.
[1] Examples in this article are based on a $400,000 principal and interest loan with repayment frequency and term stipulated and assumes that interest rates remain unchanged for the life of the loan. The examples do not take into account fees and charges that may apply other than a $600 application fee.
[2] Economic and Financial Statistics data published by the Reserve Bank of Australia. https://www.rba.gov.au/statistics/tables/xls/f06hist.xls
