The end of financial year will soon be upon us. But once you get past…
With interest rates at an all-time low, it’s time to review your home loan. Your home loan is generally the biggest expense of your entire life. Whilst lower interest rates may not sound like significant changes, over the course of a 25 to 30-year loan, saving a few bucks here and there with compounding interest can add up to a lot. By not understanding how to make your home loan work to your advantage you could be literally throwing money away. These costly mistakes could add up to thousands of dollar and extra years on the life of your home loan.
So, here are our top 4 tips for paying off your mortgage faster:
1. Get Professional Advice
Shopping around and comparing dozens of home loans is not as simple or easy as looking at the rate. It’s important to look for a home loan package that has the features you need and suits your circumstances. Good advice will help do this for you: saving you time, money, stress and provide the reassurance that you have what you need.
2. Increase Your Repayments
Increasing your repayments, even slightly can make a big difference.
On a $600,000 loan over 30 years, at 4% interest, paying an extra $200 per month could save you over $57,000 over the term of the loan and 3 years 6 months in time.
Every little bit you pay off your loan counts. Make your home loan a focus. By putting any extra income from bonuses, your side hustle etc. into on your home loan you could be mortgage-free a lot sooner.
Doing things such as paying weekly instead of monthly or paying a lump sum when you can, will all help. Interest on a home loan is calculated daily therefore making repayments more frequently may help reduce the interest you pay over the duration of the loan.
3. Interest Offset Accounts
Offset accounts enable all your spare funds to reduce your home loan interest every day. Instead of your lump sum sitting in a bank account earning little or no interest, these funds are saving you interest at your current home loan interest rate. These types of accounts do require some financial discipline, so if you see “available funds” and get tempted to spend reconsider! The benefit of these types of accounts is that the funds help to reduce your interest bill but are still available to you in an emergency. To implement this strategy, you need a loan that has this feature.
Using the same example as above ($600,000 loan, 4% interest, over 30 years), if you were to put $100,000 into an offset account 5 years into your loan after an unexpected windfall or inheritance, you could save over $136,000 in interest and 3 years and 10 months off your loan.
The added advantage of using offset accounts is that you do not EARN interest on the money, you SAVE interest. Its highly likely that the interest you earn would be less than the interest you pay on a home loan, therefore as a net benefit you are likely in front.
For example, if you had your $100,000 in 1-year term deposit earning 1.65% interest you would earn $1,650 at maturity. If you earnt $95,000 per year you would pay 37% tax plus 2% Medicare Levy on that income or $643.50. Making the net benefit of the term deposit $1,006.50 over the year. However, if you put that in your offset account, using the same loan example above, you would save yourself over $4000 in interest in the first year.
4. Renegotiate your home loan rate
It may sound too good to be true – but often a phone call to your bank with a veiled threat to leave can often result in a reduction of your current home loan interest rate.
Even a drop of 0.2% (4% to 3.8%) over 25 years on a $600,000 mortgage can save you almost $20,000 over the term of your loan.
So, get on the phone and call your bank and see what you can negotiate. You should really do this every year to make sure you are getting the best deal you can from your bank.
At Elliot Watson Financial Planning we can help you achieve more with all your financial needs, get in contact for comprehensive financial advice. We work closely with a mortgage specialist to help ensure that your money is working for you.
 Calculated using https://www.ing.com.au/home-loans/calculators/offset.html calculator
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