12 Ways to repay home loan faster

12 Ways to repay home loan faster

Loan repayment is a daunting task. Repaying it sooner seems even more challenging. If you want to repay your home loan faster without much hassle, you've come to the right place. Here we will give you simple strategies to speed up your home loans repayments.

Make fortnightly repayments
Instead of monthly repayments, try switching to making fortnightly repayments. So rather than paying your 12 monthly instalments, you pay 26 instalments a year. This method equals 13 monthly payments per year (i.e. 26 fortnights) without digging too deep in your regular income or savings. Every year you would make a repayment of one extra month.

Most times, making an extra payment to repay loans faster isn't an option. In such a case, increasing your payment frequency might work in your favour.

Do keep in mind this strategy depends on the lending policy and how your lender treats monthly and weekly payments.

Make an extra repayment
Tightening your belt and saving on regular monthly expenses will help to make extra repayments on home loans. With a fixed-rate home loan, chances are you can make additional payments of up to $10,000 for each year without additional charges. Check with your lender or mortgage broker.

Consider increasing the amount you pay off your home loan each month if you can. Most of your repayments in earlier years go towards interest payments. Even amounts ranging from $1-$10 can significantly reduce your burden in the long run.

Making extra repayment is one of the fastest ways to repay home loans faster. For example, if you paid $2 extra every month on a $350,000 home loan you could cut more than 14 months. This is assuming the loan term of 25 years and interest rate of 3.69%. Pretty good for the price of a daily morning coffee if you ask me!

By paying extra amounts, you give yourself a buffer from higher interest rates in the future - if the interest rates rise.

If you would like to know your extra home loan repayment schedule calculate it here

Consider an offset account
An offset account is essentially a savings account attached to your home loan. The amount in this account is deducted from your home loan balance, ultimately reducing the interest you pay on the home loan.

If your home loan is $350,000 and your offset account balance is $25,000 then you end up paying interest on only $325,000.

Interest paid on home loans is higher than the interest received in a savings account. An offset account can be a smart solution to reduce interest payments. Also, money in your offset account is not considered taxable income.

However, it does have its own cons. Firstly, there are additional costs such as bank fees account charges and higher interest rates. Secondly, it is necessary to keep relatively large amounts of money in the account to negate bank fees. Check with your lender for options such as no annual package fees or offset on fixed-rate loans.

Consider redraw account
Another way to paying off your loan faster is to use a redraw facility which will help you reduce the interest payments.

Redraw is a facility to the loan and not a separate account such as an offset account. Some lenders provide redraw with basic variable products which have lower interest rates. Whereas standard variable products with offset account have higher interest rates and annual package fees. Redraw can help you save annual package fees and charges.

Consider negotiation for a competitive rate
If you think your home loan is expensive, you're probably off to a bad start. Since banks keep their best deals for new customers, you want to be mindful of all available options.

If you cannot apply any of the above methods try reaching out to your current lender to negotiate rates.

Requesting better pricing can lead to either your lender offers you a lower rate of interest or you refinance to another bank. We suggest pushing for a more competitive rate of interest because you will save in the thousands if you get it.

Financial health check
A financial health check is as important as physical health. If your current interest rates are higher compared to other lenders consider refinancing. Make sure benefits outweigh any refinancing costs and fees.

Principal and interest repayments
In a principal and interest loan, repayments are used to pay off the principal amount. Hence your interest payment decreases. However, in an interest-only loan, you pay interest on the entire amount borrowed with no scope to lower the debt.

The interest-only loan is a good strategy if you apply the savings to repay an owner-occupied home loan. In case you aim to repay your investment property loan fast then avoid interest-only loans.

Pay debts in descending order
The cost of debt is determined, keeping in mind factors like interest rate, fee, and tax. Where many people fail in financial planning is that they pay off cheaper debt before.

Prioritise personal loans, credit card payments and owner-occupied home loans over investment loans. Though investment loans have higher interest rates than the owner-occupied home loan they are overall much cheaper considering the tax-deductible interest.

Utilizing income from investment property
A lot of people do not know about the debt recycling strategy. Debt recycling strategy means using equity from your home loan to invest in income-producing assets with the possibility of growth. Over time, the earnings from these investments may be paid towards your owner-occupied home helping to pay it off faster. You could also deposit the rental income from investment properties in an offset account of owner-occupied properties.

Typically, the interest on investment loans is tax-deductible. That means, this strategy has the potential to create a tax saving, which can also be put towards your home loan. This helps to pay your owner-occupied home loan faster. In addition, if your new investments go up in value, you’ll be building your wealth at the same time.

According to statistics, Australia has an average of 8% growth since the 1950s. A little strategic planning in investment property purchase may yield promising results.

Professional discounts
Few lenders offer a discount for some professionals. Lenders mortgage insurance can be waived for doctors, accountants, lawyers and certain other professions. Some lenders offer no lenders mortgage insurance loans for these professions. This helps to lower the loan amount upfront as you don't pay anything in lenders mortgage insurance.

Consolidate debts
If you have higher interest debts then consider consolidating debts with a home loan. If you have credit card payments outstanding then you can merge them with a home loan. Many lenders will allow you to refinance home loans and make a lump-sum payment of credit card debts.

Split loans
Fixed-rate loans have low-interest rates compared to variable interest rates. You could consider splitting the loan into fixed and variable portions. If you have a saving plan then opt variable loan for the savings that you will have. This will help to pay lower interest in a fixed-rate loan where there is no offset facility. Also, it will help to save in offset account against the variable loan where it will reduce interest payments.

Be sure to take up every opportunity you get to reduce your financial burden and pay off your home loans faster. For expert guidance, don't hesitate to reach out to us in the chat section.

 

For the experienced investor, some of these are 'yes, but':
Rate isn't as important as serviceability calcs which might be different for each lender - would you prefer more loans or the lowest rate?

Offset for PPOR is required. Offset for IP should be as well.

Splits and redraws have to be used very carefully with tax advisor guidance. The goal should be debt recycling.

Financial health check should be a constant habit. If you do it right you shouldn't have high interest bad debt anyway.

 

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