So, you’ve secured a home loan and bought the house of your dreams? We recognise this is no small feat, so enjoy the euphoria and let it soak in that you are now officially a homeowner!
Once you’ve settled into your new lifestyle, you’ll want to make some quick inroads into paying off your loan. In order for you to become mortgage-free as soon as possible, we’ve compiled five tips and strategies to help you pay it off faster. The practicality of each method will vary depending on your own personal circumstances, so we recommend using different combinations of the techniques below to make it work for you.
If you’re doing all these things, you’re in a great place. Pass this onto friends or family that could use the knowledge.
1) Make more frequent repayments
Mortgages are usually paid off in monthly instalments. However, by opting to instead pay off your loan fortnightly, you can significantly reduce the total time required to repay the lender. Try splitting the cost of the monthly repayment in half and paying this amount each fortnight. The advantage is that there are 26 fortnights but only 12 months each year, so you’ll be making 13 full payments per year instead of 12 – helping you pay off your loan faster.
For example, if you’ve taken out a 30-year mortgage for $200,000 with a 5% interest rate, electing to repay the loan fortnightly would save you over $34,000 in interest and reduce your time repaying by almost 5 years.
2) Make repayments at a higher rate
The technique here is to pay off your loan as if you have a higher interest rate than you actually do. Secure a loan at the lowest rate possible but pay it back at a higher rate than necessary; for example, pay back a 5% mortgage at 7%.
The benefits are that you won’t feel the pinch even if rates increase and you’ll pay off your loan faster. Conversely, if your interest rate drops, you’ll be well ahead of the game and make some serious inroads into becoming mortgage-free sooner. Get in touch with us to chat about what repayment rate works for you.
3) Choose a loan with a redraw facility
If you’re unfamiliar with the term, don’t worry – you’re probably not alone. Put simply, a loan with a redraw facility involves overpaying on your repayments. Your banked overpayment funds build interest over time and you can access these funds should your circumstances unexpectedly change.
This scheme gives you the security of money to fall back on in an emergency, but if left untouched, will allow you to pay back your mortgage years ahead than planned, potentially saving you thousands of dollars in interest. You’ll be reducing the length of your loan without actually being locked into a shorter term agreement with your lender, and the additional pressure that can bring.
4) Make lump sum repayments
Whether you’ve been a disciplined saver of dollars and cents or received an unexpected windfall of cash, using these funds to chip away at your mortgage will reduce both your overall interest costs and the total time it takes you to pay off the loan. A good trick is to treat your annual tax return as ‘bonus’ income and pay half of this off against your mortgage as a lump sum (spend the rest if you like – you deserve it!).
It pays to note that with a fixed-rate loan there may be a break cost associated with paying back lump sums during a fixed period. However, you can pay a lump sum at the end of a fixed rate term without incurring any penalty.
5) Pay administrative fees and charges up front
Avoid compounding extra interest by paying off any loan-establishment and legal fees up front, rather than capitalising them into your loan. This requires a small personal investment but will get your loan started on the right track.
Another smart idea is to make your first loan repayment on the date of settlement, rather than one month after, as generally applies. This will reduce the total value of the loan before any interest can accrue on it, which could save you thousands in the long term.
To find out more about paying off your loan faster, get in touch with Nectar today.