Buying a home is a lifetime investment for many people, and taking the responsibility to pay the loan back in 25 or 30 years is also a big commitment. By paying a home loan faster than previously expected, you will be saving thousands of dollars on interest and taking this financial load off your shoulders.
For those who want to pay off their loan quicker, we have put together seven tips to help you in this journey:
How to pay off your home loan faster
1 – Choose the right home loan for you
There are more than 30 lenders on the market from where you can get your home loan, and each one offers different features, such as offset accounts, redraw facilities, fixed-rate loans, variable-rate loans, and so on.
Choosing the right lender with the right features to match your needs it’s not simple; however, making the right choice might be beneficial in the long run. Having access to offset accounts or redraw facilities, for example, will enable you to make extra payments or choose your repayment frequency.
Having these options are important because it will allow you to pay your loan sooner, which means saving on interest down the track.
2 – Avoid interest only
Unless you are building your home or buying your second investment property, we advise you to avoid going for an interest-only home loan.
We usually advise our clients of it because when you make a repayment on an interest-only loan, as the name suggests, you are only paying the interest portion of your loan, not the principal amount. This means you will take much longer to pay off your loan, consequently, to build some equity, grow your capital and finally get rid of your debts.
Please note that the interest-only loan can be a positive choice in some specific cases, but this would need to be carefully analyzed by your mortgage broker.
3 – Make extra repayments
This tip is more like a trick for those who can organize their financial life to make extra payments per installment.
Let’s say your repayment is $500 per week, and you are comfortable enough to pay a bit more. We would recommend you pay out $750 every week, so you can shorten your loan by years and also save thousands of dollars on interest, given that these extra payments are interest-free.
Some lenders charge an extra fee for making extra repayments. This is why it is so important to have a professional to assist you when choosing the right lender for your needs. We would be more than happy if you chose Capta Financial to guide you in this journey.
4 – Consider opening an offset account
An offset account works like a regular account – you can make payments, deposits and use it for transactions – but the main difference is that the offset account is directly linked to your mortgage.
The money you hold on your offset account reduces the amount you owe on your mortgage, consequently decreasing the amount of interest charged on your loan.
The bigger the amount and the higher the period you have saved in your offset account, the less interest you will pay. And this might help you a lot to pay off your home loan faster.
5 – Budget your expenses
Organizing your financial life and understanding your income and expenditures are crucial to pay off your loan faster. At Capta, we always recommend our clients budget their expenses even before buying their first home.
When you get your finances in order, it becomes much easier to prioritize and clarify what expenses are vital for your family and which ones could be reduced. By doing that, you will also understand how much you can compromise on extra repayments and how often this would be made.
6 – Consider refinancing
Refinancing a home loan means changing your existing loan to a different one to get better rates and reduce monthly repayments.
The longer you have a loan, the more you’ll pay in interest. So, by refinancing, you might reduce the interest rate, which will significantly lower the total amount paid in the long term and help you pay off your loan much faster.
At Capta Financial, we do regular reviews on our clients home loans, and we recommend refinancing at least every 2 or 3 years. Besides saving money, refinancing is also helpful if you are looking for new features, like an offset account, as we mentioned before.
Some banks offer refinance rebates to encourage people to switch banks. This means many lenders will give you money to refinance your home loan with them and cover the costs of that move.
If you want to learn more about why refinancing and how this could help you pay off your loan sooner, please check out this blog post: Refinance home loan – Understand the pros and cons.
7 – Invest your money
This one is a bit more complex than the previous ones and might not be for everyone: Consider investing your money in other investments.
Be it on investment properties, shares, or the stock market, look for a way to make your money work for you, so you can pay off your home loan and grow your capital at the same time.
Investing your money, in some cases, might be much more profitable in the long term than shortening your mortgage. However, we know this is a complex decision that should be taken with professional guidance, especially if you are new in the investment world.
If you need help to refinance your home loan or plan extra repayments to pay off your home loan faster, please get in touch with us, and we will be happy to help.
At Capta, we take the time to get to know you and understand your needs to come up with the best mortgage solution for you and your family. Our team is based in Sydney, but we assist clients all around Australia.