As a current mortgage holder you’ve done the hard part in meeting all the lending criteria, jumped through the application ‘hoops’ securing a mortgage to buy your chosen property. Quite often at this stage your main objective was to just get an approval and buy ! Now the game changes as you have a mortgage repayment history and established equity (equity being the property value less your mortgage amount). Now the ‘shoes on the other foot’ and it’s time to negotiate a better deal and adopt as many of the below 5 tips as possible.
Following are some practical and achievable ways to knock $1000s in repayments over the life of your home loan
5 Tips to Pay Off Your Home Loan faster
Ensure you are getting the best deal from your financial institution, do you homework, shop around to ultimately ensure your loan is at the best possible interest rate and does not have annual admin fees charged automatically to the loan. You may need to consider changing banks and moving away from the ‘big 4’ in order to get the best possible rate. Some financial institutions are currently offering a $4000 financial incentive to attract new loans, that’s $4000 straight off the mortgage.
Although your home loan may have been competitive when you first took it out, lenders’ rates and fees change all the time – so it pays to stay up to date with the market.
An extra repayment is when you pay more than the minimum monthly repayment required by your lender. This not only reduces your loan principal faster, but also means you’ll end up paying less interest on your loan. Align your loan repayment to your wage cycle.
For example, if your monthly repayments were $2,000, after a year you would have paid $24,000 (12 x $2,000). On the other hand, paying every two weeks would equal $26,000 (26 x $1,000) as there are 26 fortnights in a year.
Check with your lender that extra repayments do not incur fees for paying more than the minimum. If you can afford it, paying off more than the minimum can shave years off the life of your loan and save you thousands of dollars in interest.
Basically, the more frequently you make mortgage repayments, the less you’ll pay in interest over the life of your loan. This is because interest is calculated daily, so reducing your total loan amount more frequently reduces the interest payable.
Some home loans come with a linked offset account, which allows you to reduce the amount of interest you pay on your loan by “offsetting” the total loan amount against the money in the ‘linked’ account.
For example, if you borrow $400,000 from the bank but you have $20,000 on a linked 100% offset account, you will only pay interest on $380,000.
With less interest to pay your total home loan amount will be reduced – meaning you’ll pay off your home loan faster even if you only continue to make minimum repayments.
If you’ve received a lump sum payment such as a tax return, work bonus, inheritance or dividend payments, consider diverting these funds to help pay off your loan faster and reduce the interest on your mortgage.
The term and amount of the home loan can seem overwhelming when starting out with a 25 to 30 years repayment term. This can lead to a ‘set and forget’ mentality which means the loan does not get the attention it should. Consider the above strategies and take the time to revisit the loan annually. Keep it simple by breakdown the loan to what additional repayment efforts you are able to make ‘over the next 12 months’ whilst checking you still have the best ‘deal’ and if your personal financial circumstance have improved to allow additional payments.
Remember if your short of time or not comfortable/confident in the process then engage a Mortgage Broker who will do all the ‘spade’ work and negotiate you a better deal.
Also consider telling your current lender you’re planning to switch to a cheaper loan offered by a different lender, as they may be able to negotiate a lower rate to keep your business.