Pay more whenever you can!
By far the most effective way to pay off your loan sooner is to increase the size of your repayments.
For example, if you were to pay just $100 extra every month on a $500,000 home loan over 30 years, you’d save more than $40,000 in interest!
Not only that, you’ll have paid off the entire 30 year mortgage in about 28 years!
You can use the extra repayment calculator to discover for yourself just how much you can save.
Take action! You can increase the size of your repayments over the phone with the bank or email us and we’ll help you.
Paying fortnightly or weekly is a myth
You may have been told that you should pay fortnightly to pay your mortgage off faster but all you’re doing is making two extra repayments.
The reason is that if you pay monthly, you make 12 payments a year. If you pay fortnightly, you’re making 26 annual mortgage repayments because there are 52 weeks in a year.
Banks such as the Commonwealth Bank and St George Bank calculate a fortnightly payment by getting the monthly repayments and dividing by two. In other words, your’re actually paying more than what a real fortnightly repayment would be.
You can just pay monthly and make extra repayments with the same effect!
When should you switch to fortnightly or weekly repayments? Many people find it easier to manage their money if they have their mortgage payment come out on the day after they get paid.
But extra repayments aren’t for everyone…
Most fixed rate home loans usually have a limit of around $10,000 on the amount of additional repayments you can make during the fixed rate period. If you go over this limit or want to switch to a variable rate, you’ll likely have to pay expensive break fees.
Note that some lenders also offer flexible fixed rate mortgages, which can allow you to make additional repayments.
If you’re a professional investor, it may be preferable to save money to invest in something else rather than pay back your investment loan as you may lose your negative gearing benefits.
Pay off your most expensive debt first
The cost of a debt is mostly determined by the interest rate, fees and if the debt is tax deductible or not. Most people pay off debt in this order:
- Credit cards
- Personal loans
- Car loans
- Home loans
- Investment loans
Investment loans often have a slightly higher rate than home loans yet work out to be cheaper after the tax deductible interest is taken into account. Many investors pay interest only for their investment loan and focus on paying off their other debts.
Buying an investment property
Getting a loan to buy an investment property gives you more debt so surely it means it will take you longer to pay off the mortgage on your own home? Not always!
You can buy an investment property, wait for it to double in value and then sell it and pay off both your home loan and investment loan.
Historically, property in Australia has averaged 8% growth since 1950 which means it has doubled around every 8 – 10 years. We can’t predict the future of interest rates or property prices but we’re happy to put you in touch with a buyers agent who can help you to buy a property or to let you know where other investors are buying.
If you have sufficient equity then you can usually borrow the full cost of an investment property. You can use this calculator to find out the weekly cost of owning an investment property.
Refinance or renegotiate?
It’s best to renegotiate the rate of your home loan with your bank because it’s easier to do. We can do this for you with a couple of phone calls.
When we request better pricing on your home loan, banks will judge how likely you are to leave. Based on that, they will either slash your interest rate and get you a better deal or you will actually have to refinance.
Note that you may no longer have a competitive interest rate if it’s been two to three years since you’ve taken out a home loan or had your rate renegotiated.
By securing a more competitive interest rate, you automatically save thousands over the loan term and pay your mortgage faster.
Our mortgage brokers specialise in refinancing home loans. We have relationships with almost 40 lenders all over Australia and we know which ones can offer sharp interest rates.
You can discuss your personal situation and loan needs with one of our credit specialists by calling us on 1300 889 743. You can also complete our online assessment form to receive a free quote within 24 hours.
Use an offset account
An offset account is basically a standard cheque account that’s linked to your home loan. The balance “offsets” the interest payable on your mortgage so the higher the amount you have in this account, the more interest you can save.
For example, if you borrow $500,000 and you have $30,000 in your offset account, you will only need to pay interest on $470,000.
Since the interest you pay on a home loan is usually more than the interest you earn on a savings account, you will save more and also pay your mortgage faster. The added bonus is that you don’t have to pay tax on the interest earned.
However, note that you’ll need to have a sufficient amount in your offset account to properly take advantage of its benefits.
Depending on the rate, you’d need around $8,000 to $15,000 as the average balance of your offset account just to pay for the typical $395 annual fee.
Is it still worth it? Because you save on fees for your bank account and get a lower rate on your home loan, it’s normally worth it to have a professional package loan and an offset account with it.
However, an offset account isn’t for everyone! Don’t assume that it’s right for you. If you don’t need the extra features then it’s okay to consider a basic loan with a lower rate.
Credit card magic
If you’re well organised and great at managing your money then there’s a neat trick that can score you some free flights and save you years off of your mortgage.
Let’s say that you typically spend $2,500 per month on expenses for your family. If you use a credit cards with an awards program and an interest free period then you’ll have more money in your offset account that is working to save you interest. Most credit cards can be set up to automatically be paid off in full at the end of each month.
Your average balance will be up to $2,500 lower which on a $500,000 home loan would save you around $8,625 over the 30 year loan term. As an added bonus you can use the reward points you earn to go on holidays.
If you tend to overspend then this can leave you with credit card debt which costs you more in interest. This strategy isn’t for everyone.
Is your money actually in your offset account?
A big mistake people make is to have lots of funds sitting in another account such as a savings account or term deposit! You get a lower rate of interest and you pay tax on it as well. Ouch!
In rare cases, a bank may forget to link your offset account to your loan account. We can lodge a formal complaint which usually rectifies this.
Please speak with a professional financial advisor or a mortgage broker beforehand so you know if you’ll actually benefit from an offset account.
Debt consolidation can backfire
If you have lots of personal loans and car loans, you may have considered consolidating these debts and rolling them into your home loan rate.
This may seem like a great idea at first glance because you’ll be paying them off at your home loan interest rate, which is generally much lower.
However, if you take the loan term into account, it ends up being a different story.
For example, let’s assume you have a $30,000 car loan that you need to pay at a 12% interest rate over four years. You’ll be making around $720 in monthly repayments and the overall total interest you would end up paying will amount to around $7,920.
If you consolidated it with your home loan at a 4% interest rate, you’d be paying only around $143 each month!
However, considering the average loan term of a mortgage: you could end up paying the amount off over 30 years. This means you’ll end up paying around $21,560 in total!
What you can do is consolidate the personal loan into your home loan as a separate loan account with s shorter term. That way you get the low rate and the short term! This way, you only pay 4% for four years saving you almost $5,407 in interest.