Did you know that the interest charged on your home loan is calculated on your loan’s daily balance and then charged in arrears for each repayment? As a result, there’s some nifty strategies you can use to reduce that balance and make sure you are paying off your home loan faster.
1. Monthly or fortnightly?
Say you had a home loan of $350,000 over 30 years at a rate of 6%. Your monthly repayments would be around $2100 and your fortnightly half of this at around $1050. By paying fortnightly you make one extra repayment a year – although there are 12 months in a year, there are 26 fortnights. It’s an easy way to become ahead on your repayments and, based on the example above, you would take five and a half years off your loan.
2. Offset your income and savings
Designed to house your savings and to pay your income into. An offset account does exactly that; it offsets the cash in your account against your loan amount. Using the example above, if you had $20,000 dollars in savings and income in your offset account you’ll only actually pay interest on $330,000 of your loan. Again, the interest you pay is calculated daily meaning the more you save, the lesser the amount of interest you pay on your home loan.
3. Put it on the credit card
This is one for the more organised and disciplined budgeter. It may sound counterintuitive, but by paying your income into your offset account and using a credit card for your day-to-day expenses throughout the month you can actually make a significant difference to your loan term. The strategy is to house your savings in your offset account while paying your income into it. At the same time, you use a credit card with a long interest-free period for your day-to-day expenses. At the end of the repayment period, make your home loan repayment, pay off your credit card and start again. This means your daily interest calculations will be reduced because you’re keeping the maximum amount of money in the account for the maximum amount of time over the repayment period, meaning you’re maximising your use of your offset account. Some things to keep in mind;
- Make sure it is a credit card with a long interest-free period (the longer the better) on day-to-day purchases and be diligent with your bill payments.
- The credit card limit should align with your income. If you make $5000 a month and your home loan repayment is $2100, you would have $2900 for expenses. Therefore your credit card limit should not exceed $2900. Depending on where you cap your limit, it’s an easy way to make sure you are budgeting within your means for the month or a convenient tool to help you put some extra money away.
4. Round up your repayments
It’s the simplest of the strategies. Simply round up your monthly, fortnightly or weekly repayment to the nearest hundred (or two). If your repayment is $3327 a month, then round it up to $3400 – or even $3500! These small sacrifices now add up to months or years in the long term.
5. Get a home loan health check
Is your home loan, it’s features and rate still serving you or can you get a better deal? There are a number of reasons to refinance from reducing your repayments to renovation, consolidating your debts, moving house or needing more flexibility. What you need is someone to talk you through the pros, cons and potential of refinancing. It’s easy to get a home loan health check with on of our mortgage experts by applying now.
The bottom line is that even the smallest contributions to your home loan now can have a big impact on the length of your loan and your lifestyle in 5, 10, 20 years. It’s relatively small sacrifices for big reward – future-you will be forever grateful.