- Posted 12 Aug
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There are several options you can take to lower the amount of interest you’ll pay on your home loan. With a little extra investment each year, you can shave years off the length of your loan and save thousands of dollars over all
Here are some tips to paying off your loan faster:
Ongoing extra payments
There are two ways you can contribute extra money towards paying your mortgage faster. One is to make extra payments. Instead of making 12 monthly payments, change your repayment schedule to bi-monthly if your finance company will let you.
This schedule means that you’ll make 26 payments in a year, so you’ll be paying the equivalent of an entire extra month each year. One extra payment per year may not seem like much in the short term, but it can substantially cut down the length of your loan and the amount of overall interest you’ll pay.
The other method is even simpler and requires no change to your payment structure. Each time you send in your payment, pay a little extra above your minimum. Even an extra few hundred dollars per month can shave thousands of dollars and a year or more off of a typical mortgage.
Lump sum payments
If you receive an annual bonus, tax refund, or one time inheritance, consult your financial advisor to find out if you’d be better investing the money or putting it towards reducing your mortgage interest. There are pros and cons to both approaches, so it’s best to consider this option on an individual basis. But for some home owners it absolutely makes sense to make a lump sum payment towards mortgage reduction.
Lower your interest rate
Today’s rates are at record lows, so if you have an older mortgage a home loan refinance may save you a lot of money. A lower rate will lower your minimum monthly payment and save you interest over time. But if you continue to make payments at your old rate, you’ll reduce your mortgage even faster. Shop around for loans with the lowest rates and low or no fee options.
Offset and redraw accounts
An offset account reduces the interest you pay on your mortgage by allowing the bank to make money off of your transactional account. For instance, if you open an offset account with a balance of $20,000 dollars, you would only be charged interest on $380,000 of your $400,000 home loan. This is a great option for creating an emergency savings account that also benefits your mortgage in the long term. It’s a more flexible option than making a lump sum payment because you’ll have access to the money if you need it.
A redraw account also adds flexibility to your repayment options. If you set up a redraw account, you’ll be able to reclaim the extra payments you’ve made towards your home loan if you need to access your money. In the example above where the owner made the equivalent of an extra payment every year, a redraw account would let the owner take that money back if necessary.
Some lenders offer these accounts for free, but others charge a transaction fee when the funds are accessed. So you’ll want to check the fine print on your mortgage agreement. But both approaches let you pay extra towards your mortgage without the fear that you won’t have savings when you really need them.
Let Australian Credit and Finance help you with the home buying process. Our loan experts can get you a great rate that meets your needs. Contact us today to explore your options.