3 min read | 29 Mar 2019
She is the first to say that your relationship with her doesn’t have to be forever. She doesn’t really want you hanging around any longer than you need to.
She’s only too happy to share all the ways you can pay off your home loan sooner and save thousands in the process. She’ll even reward you for paying it down faster.
Here’s five ways to get you towards home ownership faster than you thought possible:
Instead of paying your mortgage monthly, consider paying it fortnightly or weekly. Not only does it reduce the interest paid, but you make an extra monthly payment per year. #Magic.
Instead of 12 calendar-monthly payments, you make 26 fortnightly payments for exactly half the amount, which adds up to make an extra month’s payment because a month is really only 28 days.
On a $400,000 loan over 25 years at 3.59%, you’ll pay $2022 per month for 25 years (total paid: $606,556), but if you pay $1011 per fortnight, you’ll pay off in 22 years and one month and only end up paying $579,091.
If you take it a step further and pay $505.50 per week, you save another thousand dollars and another month off your loan.
An Offset account is linked to your mortgage account and reduces the interest payable on the principal by the amount in your offset account. A redraw facility works in much the same way but extra repayments you have made on your mortgage, that you are able to access and withdraw, and reduces interest payable in much the same way.
If you have a mortgage of $450,000 but have $50,000 in your offset account or in your redraw, you only pay interest on $400,000 of your loan (whilst ever the money remains in those accounts).
On a loan at 3.59%, that’s a saving of $253 in repayments per month.
Now, if you plough those savings straight back into your loan, it comes straight off the principal amount, saving about five years (four years and seven months to be precise) on your loan term and about $62,755.
Start as you mean to go on. Instead of waiting a full first month to make your first payment, pay it immediately when your loan settles.
This puts you a month ahead, and what would have been your first payment, becomes your second and so on.
When you crunch the compound interest figures on a $400,000 loan at 3.59%, an initial extra payment will save you more than $3,500 in interest repayments over the life of the loan and reduces your loan term by about two months (on a 30-year loan).
It all has to do with compound interest, which is interest-on-interest, year-on-year. And it’s not pretty to see on a home loan.
If your interest rate decreases, your lender will automatically reduce your payments in line with that.
By keeping your payments at the same higher level, you can get ahead on your home loan.
When life is going well, and the boss has given you a pay rise and bonus, it’s tempting to splurge (new dress, new car and so on), but if you throw that bonus into your mortgage or pay a bit extra each month, you can pay that sucker down.
Assuming the same hypothetical $400k loan at 3.59%; just paying $20 extra per month could add up to more than $5,000 in savings and six months off the life of the loan.
And your work bonus could be worth even in your mortgage than it is worth in retail dollars (though way less fun). A payment of $2,000 (bye bye bonus) will cut your loan term by three months and save you $3,841.31 in interest repayments.
It is worth noting that all these numbers change according to where you are in your home loan’s life, and how much you have already paid off, but some savvy planning could see you paying your mortgage years ahead of schedule.