4 min readLet’s face it: no one dreams of having a mortgage, but we do dream of owning our own home.
However, for the vast majority of us, home loans are a necessity. Fortunately, there are a lot of steps you can take to work towards getting rid of your home loan debt quickly. Just because you have to have a home loan, doesn’t mean it has to follow you around forever.
Round up your repayments
If you round up your repayments to the next $100 increment, the difference it makes can be huge. For instance, let’s say you have a 30-year home loan of $500,000 with an interest rate 4.50%. Your monthly repayments would be $2,533.43, and the total cost of the loan over the term would be $912,033.56.
Now let’s say you decided to round your repayments up to $2,600 a month. That’s only $66.57 more per month, but the difference it makes is significant. Now, instead of paying a total of $912,033.56, you’d be paying a total of $887,112.98. That’s $24,920.58 you’d save in interest payments.
This strategy doesn’t just save you money. It also saves you time. Using the example above, you’d knock one year and seven months off your home loan term. A little extra money goes a long way.
Devote financial windfalls to your home loan
The average Australian tax refund in 2016 was $2,112. It’s always nice to get a bit of extra cash and it’s certainly tempting to spend it on holidays or big-ticket consumer items, but applying that amount to your home loan can make a big difference.
Devoting that $2,112 to your home loan in the first year that you have it will knock an entire three months off your loan term. Doing so the second year will reduce your loan term by two months. Now imagine how big a dent you could make in your home loan if you devoted your tax refund to your mortgage every year.
Assume a higher interest rate
If you have a variable rate home loan, it’s highly unlikely that your rate will remain static throughout the life of your home loan. Paying your home loan as though you have a higher interest rate will prepare you for the eventuality of your rate going up.
A nice side effect is that it will also knock time off your home loan. Let’s assume you have the 4.50%, $500,000 home loan that we used in the example above. As we saw before, your monthly repayments would be $2,533.43.
Now, if you decided to pay off your home loan as though the rate was 5%, your monthly repayment would rise to $2,684.11, which means you’d be paying an additional $150.68 every month. By doing this, you would save a whopping $52,103.35 in interest and knock an astonishing three years and four months off your home loan.
Use an offset account
An offset account is a great tool for saving money and time on your home loan. It works by offsetting the amount of interest charged on your home loan by the amount that’s in the account.
For example, if your have a $500,000 home loan but have $10,000 sitting in your offset account, interest is only charged on $490,000. That means that more of your regular home loan repayment is going towards paying off the principal, or the initial amount that you borrowed, rather than the interest.
Parking $10,000 in your offset account can shave 11 months off your home loan. Regular contributions to an offset account can see you paying off a 30-year home loan in 25 or even 20 years.
Refinance for a better deal
One of the best things you can do to pay down your home loan quicker is to find a better deal. The home loan market is full of sharp deals at the moment, particularly for owner-occupiers, and it’s not uncommon to find home loan rates below 4%.
The catch to this is that while a cheaper home loan will reduce the overall amount that you have to pay, it will only reduce your home loan term if you make extra repayments. But if you’ve already budgeted for your current repayment amount, keeping this repayment up shouldn’t be a problem.
Let’s look at an example. With our hypothetical $500,000, 4.50% home loan, you were paying $2,533.43 per month. Let’s say that after having your home loan for five years, you refinance to a lender with a 3.75% rate, which is certainly plausible in the current market. This takes your repayments down to $2,315.58 per month. But what if you kept up with the $2,533.43 repayments that you’d already budgeted for? That additional $217.85 would take two years and three months off your home loan.
With a little bit of discipline and effort, there are a variety of strategies that you can use to reduce your home loan term (and the amount that you have to pay!). A home loan is a long-term commitment. How long-term, though, is up to you.