Tips to pay off your home loan faster
When you first purchase your home, your home loan can seem overwhelming. It can be tempting to take a conservative approach and pay only as much as the bank requires. However, with a few strategic efforts, you can pay it off a little faster, and save yourself extra money. Keep in mind, the interest you pay is based on the amount of principal you have borrowed, so when you reduce the principal, you cut down on the interest you pay over the lifetime of the loan. Yet paying off your loan faster doesn’t need to be a painful exercise. These tips will help you reduce the principal without too much stress.
1. Pay your upfront costs
When you first purchase your home, you have the option of paying all your mortgage fees and charges upfront, or your lender can simply add it to the overall amount that you borrow. You can start ahead of the game by working out how much all these additional charges will be, so you can pay them upfront. This means you are not adding costs to your mortgage, and you won’t be paying unnecessary interest further down the line.
2. Start out ahead
Yes, you are short of money after all the expenses of purchasing a property, but start the way you intend to continue, and make your first mortgage payment a good one. Your first payment is due one month after settlement, so if you can make a payment on your settlement date, you are starting out one month ahead. It’s never too soon to start chipping away at the principal.
3. Choose your loan features wisely
If your goal is to pay off your home loan as quickly as possible, you need to choose loan features that support that goal. For example, you want to be able to make additional repayments when possible without having to pay fees or charges. An offset account is another loan feature that can help you pay off your loan more efficiently by reducing your interest repayments.
4. Stick to the higher rate
As your interest rate fluctuates, stick to making your repayments at the higher rate, so you can reduce the principal, thereby cutting down on the cost of interest payments over the life of the loan.
5. Consolidate your debts
The interest rates on your credit card and any personal loans are generally higher than the interest rate on your home loan. So, if you have other debts, try refinancing all these with your home loan, so you can take advantage of the lower interest rate. Paying a lower interest rate gives you more funds to reduce the principal of your loan.
6. Deposit any lump sum payments
If you receive a bonus from work or a small windfall through an inheritance, keep in mind that you can drastically reduce your interest payments over the long term by making a lump sum payment into your mortgage. Even a small lump sum on top of your regular payments can make a huge difference to the interest you will pay over the lifetime of the loan.
7. Stay informed
While you might be happy with your loan features and your interest rate, it’s always wise to keep monitoring the mortgage market to see if there is a better deal for your circumstances. Remember, the market is changing all the time, and as your financial situation shifts, there might be better options out there for you. Talk to your mortgage broker regularly to discuss whether you still have the right home loan for your needs.
If you realize that you can do better than your current home loan, don’t be hesitant to make the change. Refinancing your home loan to a more
compatible rate can bring you significant savings while cutting down on the length of your loan.