Mortgages, Money and Me

Repay your home loan early

Australian home loan interest rates remain at historic lows which means that the opportunities for paying off a mortgage early are better than ever. Used in conjunction with low rates, here are some extra steps that can speed up loan repayments and reduce your loan balance.

Increase your repayment amounts

The simplest way to pay your home loan early is to increase the amount you repay. By repaying more than the minimum you can cut the overall term of the loan and save thousands of dollars in interest.

You see, each principle plus interest repayment consists of exactly that… an interest component and an amount that reduces the amount you owe. Early in your mortgage the interest is the majority of this payment.

For example, a $400 000 mortgage at 5% over 30 years will have principle plus interest payments around $2150 per month. $1666 of this is interest, so if you can pay an additional $484 per month, you have effectively reduced your loan balance by double the amount, you will cut 10 years off your loan and save around $140 000 in interest!

Or put another way:

$400 000 x 5% interest = $1666 per month
Scheduled repayments = $2150 per month
Balance of loan reduced = $2150 – $1666 = $484 per month

You may not be able to afford an additional $484 per month, but even if you pay a little extra it will still make a difference. You can calculate your own savings on this calculator:

Extra repayment calculator

Be aware, some products may charge you an early payment fee for paying your loan in advance. These costs can be large, so it’s best to always check beforehand.

Make more frequent repayments

Home loans are often structured so that you make monthly repayments. But making fortnightly repayments instead can reduce the term of a loan and save interest. By making fortnightly repayments, you are paying the equivalent of half of your monthly repayment every two weeks. This allows you to make the equivalent of one extra monthly repayment per year. Extra repayments will ensure the loan balance is lower at the time of the month the interest is calculated.

Consider how mortgage features can help

Think about how using an offset account or a credit card linked to your home loan might help you keep your loan balance low. If you’re looking for ways to keep your interest down, it’s worth investigating what other features your home loan comes with.

For example, an Offset Bank Account helps reduce interest costs on a home loan by linking the loan to a separate savings account. The balance in this account ‘offsets’ the home loan principal. Interest is then calculated on the home loan principal minus the balance in the offset account. If the principal on your home loan is $180,000 and there is $5,000 in your offset account, then interest is only calculated on $175,000. As an investment that’s like a guaranteed return – tax free – and will far outperform any savings account (where interest IS taxed).

Try out our handy mortgage offset calculator to see how much you can save.

Don’t take reduced repayments with a rate cut

When a lender reduces the interest rate on its home loans, usually in line with a cut in official interest rates, your first thought may be to reduce your loan repayments accordingly. However, by maintaining your loan repayments, you effectively repay more than the minimum loan repayment. If it’s possible to do so, this will help you cut the term of the loan and save on interest.

Don’t pay interest-only

An interest-only loan might mean you’re able to make lower repayments for the first few years, but this means your repayments will be larger when it comes time to pay off the principal.

Seek out lower rates

Although obvious, many borrowers take out a mortgage and then stop following the home loan market. With interest rates constantly changing, it pays to monitor the latest rates. If rates go down, contact your lender or broker and ask if they can reduce the rate on your loan. Feel free to contact me at any stage to see if refinancing is right for you.

Consider split loans

A split loan, sometimes referred to as a combination loan, enables borrowers to divide their mortgage into both variable and fixed components. By doing this, you can have the advantage of an offset account and penalty free additional repayments on the variable portion, and the security of knowing exactly what your repayments will be on the fixed portion.

Get a financial package

You can often lock in a discounted loan rate with a financial package and also find special rates on other products and services. Putting those savings into your mortgage is a great way to get the best of both worlds.

With just a few easy steps, you can significantly reduce the length of your mortgage and save thousands of dollars in the process.