Paying off your home loan faster

Hundreds and thousands of people in Australia are throwing their money away by choosing the wrong mortgage! You can easily half the cost of your mortgage. Sounds impossible? It’s not that hard when you know how. All it takes is 2 easy steps:

  1. Get the best mortgage! In simple terms this really means getting the cheapest home loan.
  2. Apply simple proven interest saving techniques.

As you will see, it’s not all about complex products or investing in expensive mortgage reduction software. If you follow through with these two steps I guarantee that you will dramatically reduce the cost of your mortgage.

Fortnightly Repayments

You can save money by making repayments fortnightly. If you divide your monthly repayments in half and make your repayments once a fortnight, you make one extra repayment each year. Dividing your minimum monthly repayment into two fortnightly or four weekly payments can reduce the term of your loan in two ways:

  1. because there are more than two fortnights or four weeks in every month, dividing your original monthly repayment into two or four means you actually pay more over the course of a calendar month.
  2. when interest is calculated daily, the more frequent repayments result in less interest being charged to your loan over the course of a month.

Extra Payments

Making additional repayments beyond what’s required in your minimum monthly repayment is one of the best ways to reduce the total interest paid and term of your loan. If you can afford it, regularly add a little bit extra to the amount you repay each fortnight. An extra $40 a week may not seem like much money, but it will make a significant difference to the amount you end up repaying over the life of a 30 year home loan. However, make sure that your loan allows you to make additional repayments without penalty. Fixed-rate and basic (or ‘no-frills’ loans) often have restrictions on extra repayments or charge a fee for the privilege.

Make your surplus cash work harder

Use cash savings to help pay off your loan quicker. Remember the old saying ‘a dollar saved is a dollar earned’ If you have a home loan at 7 per cent, every extra dollar you pay off the principal is another dollar you are not paying 7 per cent on each year. If you instead put that extra dollar into a savings account you are only going to earn 3 or 4, perhaps 5 per cent at the most. Therefore putting savings into your loan earns you twice as much as a savings account.

These days, redraw facilities available on most standard variable loans allow you to take back those extra payments if needed anyway.

Save with a line-of-credit loan

Disciplined borrowers can make use of the increasing range of line-of-credit loans, also called all-in-one loans, which offer the chance to make every spare dollar work to reduce your home loan. These loans allow your income to be paid directly into the loan account to reduce the loan outstanding sooner than waiting for the repayment due date. You are also effectively making larger repayments because you only withdraw the money you need to live on each month, leaving all surplus cash in the loan account to reduce the balance. In this way, the loan can be paid off much quicker and thousands in interest saved. Line-of-credit borrowers must be disciplined, however, and not withdraw more money over time than is going in. Income must exceed your total expenses by at least the value of your principal-and-interest loan repayment before there is any financial benefit.

Remember visit the mortgage Report Card to find the best home loan. Good luck!

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