With the rapid rise in house prices in Australia over the last decade, a lot of Australians have borrowed big to get into the market and own their own home. For a lot of people, this has put a large strain on their personal budgets, making repayments difficult.
Making repayments on your home loan is a very big responsibility, and not keeping on top of your repayments can come with real consequences. You could end up being hit with late repayment fees, paying more interest on your loan, and ultimately staying in debt for longer.
But there are some steps that you can take to really take control of your mortgage. This article is a mortgage repayment guide, showing you how to pay off your mortgage faster, saving on both fees and interest.
Staying on track with repayments
When taking out a home loan you need to take time to plan how you are going to pay it off. Aside from issues of fees and interest, the two big factors that come into this are
- your budgeting plan, and
- your repayment scheme.
You should be setting yourself a budget so that you can stay on top of your payments. This is really important to make sure you keep chipping away at your mortgage, but also so that you avoid late repayment fees.
You also want to make sure you have a repayment scheme that suits your needs. There are certain home loans that allow flexibility in their repayment schemes. For example, Greater Bank’s Great Rate Home Loan allows you to choose between paying weekly, fortnightly, or monthly. Sorting out what’s best for you will depend on your income source and expenses.
You should also be reassessing your financial position at least annually to make sure you are optimising your repayment strategy. Over the length of a mortgage, your financial position could vary quite a bit. Changes to your income (for example a promotion) and expenses (for example paying for the care of an aging relative) could influence the way you pay off your mortgage.
By reassessing your budget regularly, you can ensure that your mortgage is paid off as fast as possible, with the lowest possible fees and interest. This might mean refinancing to a different home loan with a better interest rate or different repayment scheme.
How to pay off a home loan faster
There are a range of different things that you can do to pay off your home loan more quickly, from refinancing to simply making higher repayments. These strategies could lower your outstanding loan amount, therefore lowering the ongoing interest that you pay.
There are a few ins and outs to these different strategies, though. For example, refinancing and making higher repayments could come with a cost in the form of a charge or fee, depending on your loan agreement with your lender. It’s often a balancing act between, on the one side, the savings you make on lower interest rates and faster repayments and, on the other side, the penalties you face in doing so. In what follows, we offer advice about the best ways to pay your home loan off faster, paying as little interest as possible and minimising fees and charges.
Refinancing and switching loans
Continually reassessing your financial position and how it maps onto the terms of your home loan could lead you to consider the options of refinancing or switching between home loan products. The home loan market in Australia is competitive and really good offers do come along when lenders are trying to attract new customers. You might, for example, want to capitalise on a low fixed interest rate for a period of your loan. Reassessing your options and making decisions like this could help you pay off your home loan faster - paying less interest and probably also lower the minimum repayments you need to make.
If you are looking at refinancing, your bank may charge you a discharge fee. If you refinance, you may also have to pay a number of fees to your new lender that you paid at the start of your home loan. So the trick is to balance the advantage of a better interest rate against the costs of getting it.
It’s also always a good idea to have a chat to your own lender before making a move. You may find your bank is willing to accommodate you to keep you on as a customer.
Make higher repayments
One of the simplest ways of reducing the total cost of your mortgage, and to pay it off faster, is to make higher repayments. Making higher repayments will simply reduce the balance of your loan faster, and so it will reduce the ongoing interest you pay on your loan, and ultimately reduce the total amount of interest you will pay over the course of the mortgage. | Greater Bank
Home loan products can dissuade customers from making larger repayments and paying off their home loans earlier by imposing fees on customers making larger or extra repayments. Read on to see how to tackle these penalties.
Early repayment fees
Banks may charge a fee if you want to make an early mortgage repayment. They charge these fees to offset the earnings they lose from the interest you would otherwise have paid on the larger amount. Some banks, though, won’t charge these fees. For example, Greater Bank offers access to free redraws via internet banking on a number of loans.
If it looks like you’ve moved into a situation where you could make repayments at a faster rate in the long term, it’s worthwhile looking at switching to a loan that doesn’t have any repayment fees (or simply one with a different repayment schedule). You might, for example, have received a promotion at work, or had to stop paying a significant regular sum (like school fees when your kids leave school). In these situations, you could make a bigger a dent in your home loan.
But if your current lender is going to charge you a fee every month to pay extra off your loan, then it won’t be as beneficial. So look around for better deals. Greater Bank’s Great Rate Home Loan allows you to make unlimited extra repayments on your loan, without any fees. The Great Rate Home Loan and the Ultimate Home Loan also allow free redraws via internet banking, which means that you can re-borrow your extra repayments you’ve already made.
An offset account is a savings account that is linked to your home loan, which is used to offset the balance of your remaining loan. The lender will general offset the balance in the savings account against the loan, decreasing the amount against which you pay interest.
For example, you could have an outstanding loan balance of $300,000, at an interest rate of 4%, as well as an offset account with $40,000 in it. In that case, the loan would be offset by the $40,000 and you would only be charged interest on $260,000. With the offset account, you would pay interest of $10,400 for the year, whereas without it you would pay $12,000. It’s a saving of $1,600 in interest charged.
The benefit of offset accounts for banks is that it ensures that you are doing more business with them. Greater Bank offers a linked 100% Ultimate Offset account with its Ultimate Home Loan.
Combining Lenders' Financial Products
Aside from an offset account, there are other ways that you can get a really good deal out of your lender to help pay off your loan faster. Some home loans, for example, come with free or discounted credit card products. Banks offer benefits for using their credit cards because they earn more money the more you use them (due to interchange fees between it and the merchant’s bank).
You can also get other worthwhile benefits from home loan products that will work to save on expenses in other areas so as to offset your loan. For example, Greater Bank’s Ultimate Home Loan comes with discounts on home insurance. This means you can save on other expenses and make larger and faster contributions to your loan repayments.
Quick tips to pay off mortgage faster
- Make sure you set up a budget and stick to it
- Reassess your financial position annually (taking into account new sources of income and debt)
- When reassessing, make sure you do your research on other available loan products
- If there are better interest rates available elsewhere, don’t be afraid to refinance
- Make larger mortgage repayments if possible
- Avoid early repayment fees to lower your interest and get rid of your mortgage faster