How to pay off home loan faster?
In most cases, even small changes in your mortgage repayment strategy can help you pay off your loan faster, potentially saving you tens of thousands of dollars.
1. weekly or bi-weekly repayments instead of monthly payments
Making bi-weekly payments is a simple and effective strategy to help get out of a home loan faster by adding the equivalent of one monthly payment per year compared to making monthly payments.
While this may not sound like much, the extra repayment can add up to a lot. "For example, on a $350,000 loan with an APR of 4.50% and a 30-year term, making bi-weekly payments saves $49,058.94 and reduces the term of the loan by four and a half years. And paying weekly mortgage repayments can save even more."
2. Increase the minimum repayment amount
Increasing the minimum payment is another easy way to pay off your loan faster. Even if you pay an extra $50 or $100 a month, you can save thousands of dollars in interest and, in most cases, reduce the repayment term by several years. If the loan product comes with a redraw feature, any excess over the minimum payment can also be withdrawn if necessary.
3. Hedging accounts
Hedging accounts are loan features that help save interest. For example, they allow the amount of savings to be used to offset the loan owed. For example, a $250,000 loan with an interest rate of 4.50% and a loan term of 30 years would pay only $225,000 in interest on the loan if $25,000 in savings is maintained in a hedge account. In total, you save at least A$59,000 in interest and shorten the term of the loan by almost four years.
Most mortgage rates are higher than savings accounts, so Tovey believes that using a hedge account to save on loan interest is a great and non-taxable option for people who want to maximize the return on their money while paying off their loan faster.
If the mortgage contract has been going on for a while, it may be time to consider a replacement. Right now, yes mortgage rates are historically low, but nearly a third of Australians are not aware of their mortgage rates, which means they are not at an updated rate and may be paying too much to repay their loan.
Most fixed rate loans do not allow for additional repayments or early repayments of the loan unless penalty terms are accepted. However, if you have a variable rate loan, you can take advantage of the low interest rates, hedge accounts, loan program withdrawal features, and more flexible loan features to refinance. You should talk to your lending bank to find the best option.
5. Additional one-time payment
A regular lump sum payment on a loan is another easy way to help lower a home purchase loan faster. For example, a one-time payment of $10,000 for a 30-year, 4.50% APR $300,000 home purchase loan can save $26,000 in interest.