After buying your house with a mortgage, you will typically have 30 years to pay off the debt. However, it doesn't necessarily mean you have to carry such burden for this long. Fortunately, here are five simple and effective ways to get ahead on your mortgage and save a significant amount of money on interest payments.
1. Make extra principal payments
One simple way to get rid of your mortgage faster is regularly paying a bit more off your loan; i.e. add an extra $30 on top of your normal repayments. For a typical 30-year principal and interest mortgage, most of your payments during the first five to ten years go towards paying off interest. So every extra dollar you put in during that time will reduce the amount of interest you pay and shorten the life of your loan.
Also when interest rates fall, some people may wish to reduce their monthly repayments so they will have some extra money to spend. It sounds tempting, but please consider keeping the repayments as they are. This will cost you less over the long run. However, check with your lender if there is a fee for making extra repayments.
2. Use lump sums effectively
When you receive an unbudgeted lump sum payment - a tax refund or work bonus - instead of buying luxuries or going on a holiday, consider spending the cash on your loan. You can use such windfall to make a lump sum payment on your home loan to dramatically accelerate your repayment progress. However, again please check with your lender beforehand whether there are any fees or restrictions. For instance, normally you can only make additional repayments up to $20,000 for a fixed-rate home loan and fees may occur after that.
3. Refinance for a lower rate or a shorter term
When paying your mortgage, it is important to check that your interest rate is at the lower end of the spectrum. The difference between the highest and lowest home loan rates can be over 2%. So if you find a lower rate for a similar product elsewhere, try to negotiate with your current lender for a better home loan rate (because lenders are always keen for businesses). If you can't get a better deal, you can always switch to another lender. The thing is that lenders usually offer their best deals for new customers. Just make sure the benefits outweigh any fees that will occur.
While refinancing, you can also change the loan terms. The 30-year home loan is the most popular choice, but lenders also offer shorter loan terms, such as 10-, 15-, 20-, and 25-year loans. Although a shorter repayment period means higher monthly payments, you will pay less interest over all. You can also get a lower interest rate for shorter term mortgage compare with a longer term mortgage. So if you can afford a higher monthly repayment, it will be a wise choice to change to a shorter term mortgage.
4. Switch to fortnightly payments
If making extra repayments is not an option, you could try to pay more frequently. Rather than making repayments monthly, consider switching to fortnightly repayments. Over a year, you will make 26 payments, and by paying half the monthly amount every fortnight, this will sum up to 13 regular month's repayment. And you can squeeze an extra monthly repayment every year without too much impact on your budget. However, remember to ask your lender how they treat different repayment methods to avoid confusion.
5. Consider an offset account
A home loan offset account is a savings or transaction account linked to your home loan. Instead of earning interest, the money in an offset account reduces the amount you owe. This balance is deducted from your home loan balance and then your interest is calculated based on the difference. Using an offset account is a smart way to reduce the amount of interest you pay and also helps you pay off your mortgage faster. Do note that lenders may charge fees for an offset account and it may not be worth paying for this feature if your offset balance will be low.
There are many reasons why paying off your home loan earlier can be a positive choice. You can save more cash over time and have less worries about rate hikes. Most importantly, you will own your place outright without paying a lender.