The size of Australian home loans has been growing for some time, which is why it's so important to think about the most effective ways to reduce your interest costs and pay off your home loan faster.
If you’re considering trimming your loan term to pay off your mortgage faster, here are some tips to help you:
The best place to start is to have a sound knowledge of exactly how much you owe. There's little point in dealing with uncertain figures, so contact your lender and discuss what your current repayment schedule looks like.
Most lenders will accept a home deposit of at least 20% of the property value. Paying 20% or more allows you to avoid paying Lenders Mortgage Insurance. Having a larger deposit means you will be borrowing less.
For example, having a 40% deposit, on a $500,000 home would mean you have a $200,000 deposit. Therefore, you are only borrowing $300,000.
This means you have less to pay off, and therefore will pay less interest over the life of the loan.
Making more frequent repayments is one simple strategy to pay off your mortgage faster. Consider changing your repayment frequency to fortnightly instead of monthly.
Since there are 12 months in a year, but 26 fortnights, fortnightly payments can help you make an extra month’s worth of monthly repayments each year without you even realising it.
This is an effective strategy because you’ll be paying an extra monthly repayment per year. By paying 26 fortnightly repayments in a year, this works out to 13 full monthly repayments. Let’s say you have a 30-year mortgage, this will be trimmed down almost 6 years when you decide to pay fortnightly.
As an example, imagine you take out a $400,000 loan for 30 years at an interest rate of 3.64%. Your monthly payments will be $1,827.58. Over the duration of the loan, the total amount you repay will be $657,931 including both principal and interest.
If you switch from monthly to fortnightly repayments, you’ll be paying an extra $1,827.58 each year. This will cut the time it takes to repay your loan by three years and eleven months. You’ll also save $38,145 on interest charges.
Making extra and lump sum payments towards your principal amount can have a significant effect on reducing the overall interest charged, especially during the early stages of your loan term. So if you have some spare savings or fortunate enough to receive an unexpected windfall, you could find it beneficial to use at least some of it to make an overpayment.
Before you borrow, ask your lender if it’s possible to make extra repayments towards your mortgage. Generally speaking if you have a variable rate mortgage, it’s possible to make additional repayments.
Our home loan repayment calculator is a useful tool to calculate how additional lump sum and extra repayments affect your home loan.
At loans.com.au , you can make unlimited extra repayments and lump sum repayments on your variable rate home loan and up $10,000 extra repayments per year on your fixed rate loan.
Review your loan and rate regularly, always make sure you are looking for better rates. Switching to another lender by refinancing your home loan can save you significantly.
Non-bank lenders like loans.com.au can provide more affordable rates for home loans than banks due to fewer overheads.
This means doing business costs less and those savings translate directly into lower interest rates and fees for customers.
At loans.com.au, we offer an offset sub-account that you can add to your home loan. You can deposit your savings and salary in your offset sub-account. Any money in the account is offset against your loan balance, and interest is only charged on the difference. For example, if your loan amount is $350,000, and you have $50,000 in your offset, then you will then only need to pay interest on $300,000.
Consider adding offset sub-account to your home loan - talk to one of our friendly lending specialists to get started.
Interest-only home loans involve making repayments that are only covering the interest on the amount you borrowed (the principal).
Interest-only home loans are usually only for a set period of time, e.g. for five years, and then the loan reverts to a principal-and-interest (P&I) home loan. During this five-year window, the repayment amounts are lower.
The difference between an interest-only home loan and a principal and interest home loan comes down to what the repayments are going towards.
When paying off an interest-only home loan, the repayment amounts are only covering the interest owed on the principal amount. This means you’re not chipping away at the principal, which is what happens when paying off a principal-and-interest home loan.
Those wishing to pay off their mortgage faster would be advised to avoid interest only loans.
While repayments will be less during the interest-only period, the monthly or fortnightly loan repayments will eventually go up when your loan reverts to principal and interest repayments.
If your payments are too high, only reduce your fortnightly payments as a last resort.
Other options like extending your loan or paying monthly are also possible, but if you want to pay off your loan as quickly as possible, reducing your repayments is going to make it difficult.
The main strategy to avoid this is taking on a loan you can afford.
Using our borrowing calculator, you can estimate how much you can realistically borrow based on your situation.
Not taking on a loan that is too big and will help you avoid reducing your repayments and paying off your mortgage faster.
Related: How to increase your borrowing capacity.
A split rate home loan is a combination of fixed and variable loans.
They allow you to ‘split’ your interest rate into multiple separate accounts. The most common is to have two accounts, with one being a fixed interest rate and the other being variable, enabling you to receive the benefits (also the drawbacks) of each loan type.
These splits don’t have to be even either. You can do a 60:40 split for example where 60% of the loan is on a variable interest rate, and 40% is on a fixed rate. All in all, split home loans are a flexible loan type, and have several advantages which we’ll explain below.
For example, you have a home loan balance of $350,000. You decide to split your loan by 20/80 then 80% or $280,000 will be variable and the remaining 20% or $70,000 will be fixed for a time.
Splitting your home loan lets you reap the benefits of a variable rate where you can make additional repayments and get access to your offset sub-account. It also allows you to minimise the risk of increased repayments by fixing a portion of your loan.
At loans.com.au we are offer low fixed and variable rates. We also offer split loan facilities too, meaning you can take advantage of both of these extremely low rates to save on your home loan at your own discretion.
Find out more about the benefits of split rate home loans.
Being free of other financial constraints or debt can also help you pay off your home loan faster.
You won’t be able to take advantage of making extra repayments, or lump sum payments if your disposable or extra income is being put towards other debt.
Consolidating your debts before you buy a home will also improve your borrowing power when you come to a lender asking for a loan.
Bridging finance is when you buy a home whilst still living in a home with an existing home loan.
A Bridging Loan covers the time between buying a new property and settling on the sale of your existing one.
If you want to pay off your new home loan as soon as possible, it’s advised you don’t have a bridging loan that you need to pay off.
Staying with friends or family if possible in the interim, will help you to hit the ground running when you buy your new home.
Planning to reduce the size of your mortgage this year could be a wise strategy, but you'll need to be prepared by having all the necessary facts and figures to hand. This is a process you should go through every so often and certainly when your current deal comes to an end to make sure you're still on the most competitive product.
Speaking to an expert is the best place to start, as they'll be able to advise you on what products are available. Get in touch to discuss these in more detail and find a home loan that will put you in a more favourable financial position.
Whether you’re looking for your dream home or investment property at a low rate or simply want to stop paying too much on your existing home loan, we’re here to make it easy for you.
Get in contact online, or over the phone with our award winning team to take the first step towards home ownership.
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.