How to pay off the home sooner: 10 tips you need to know - Pearl Financial

How to pay off the home sooner: 10 tips you need to know

By Shane | Fundamentals

Jan 19

Have you ever wondered if there was a way to pay off your home loan sooner? Interest rates are at historic lows, and whilst there is plenty of speculation about which way they will move next, it is still a great time to capitalise on opportunities to smash your debt. Let’s take a look at 10 tips that could help you shave years off your home loan.

Make higher repayments

Possibly the simplest way to pay off your home loan sooner is to make extra repayments. The minimum repayment is calculated by the loan term and the interest rate, so if you’ve taken a loan out over 30 years, your minimum repayment will only extinguish the loan after 30 years. Making higher, or extra, repayments could shave years off your home loan and significantly reduce the amount of interest you pay.

Wondering how much time and interest you could save? Check out our extra repayment calculator here.

Make more frequent payments

A lot of home loans are set up to have monthly payments. By making fortnightly or weekly payments you will end up making extra repayments on your home loan each year. For example, if you make fortnightly repayments, you will effectively make an extra months payments per year since there are 26 fortnights in the year.

Use an interest offset account

An offset account could potentially help you reduce the amount of interest you pay. Not every lender will have an offset account as an option, however, if it is available, any money in the account will offset the total loan balance, meaning that the interest is calculated on a lower amount.

Find a lower rate

Home loans are definitely not ‘set and forget’. The lending market is constantly evolving and new loans and specials are frequently added to the market. The result of this is that home loans with lower interest rates can become available. This doesn’t necessarily mean that you have to refinance your home loan… you could always contact your current lender to see if they will reduce your interest rate.

Pass up on any rate cuts

If the official interest rate is lowered by the Reserve Bank of Australia, many lenders will pass on either the full rate cut or at least a portion. This doesn’t mean that you must pay the lower amount… by electing to keep paying the same amount, you will be effectively be making extra repayments and therefore pay your home off sooner.

Pay both principal and interest

Interest only loans mean that, quite obviously, you are only paying the interest. Whilst the repayments are lower, you aren’t actually reducing the principle… meaning that your home loan isn’t reducing as fast as it possibly could.

Pay fees upfront

Some lenders will have various fees when establishing a home loan. Rather than adding these to the loan amount, you can elect to pay these upfront, effectively reducing the starting loan balance.

Use your home equity

There are many wealth-building strategies that involve using the equity in your home. Some of these strategies allow you to generate additional income whilst potentially also receiving extra tax deductions. You should speak to a financial planner to execute this strategy.

Set up a split loan

A split loan is where you divide a loan between both variable and fixed components. The variable loan allows you to make extra repayments, while the fixed loan allows you to lock in lower interest rates.

Get a professional package

Many lenders offer a professional package that offers discounted interest rates, and potentially discounts on other financial products. The savings you achieve from these discounts can be redirected into the home loan, reducing it faster.

It’s possible to significantly reduce the time to pay off your home loan and also the interest you pay by implementing the tips above. Some are more complex than others so you should seek professional assistance from a mortgage broker and/or a financial planner.

If you’d like to know more, contact us and we’ll be happy to help.

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About the Author

Shane specialises in helping Gen Y professionals and business owners make an impact by accumulating more assets, generating more income, and having more time to enjoy life. He has a Master of Applied Finance, an MBA, and a Master of Financial Planning. He is also a terrible golfer.

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