Making extra repayments on your home loan can be a clever financial strategy. Investing spare cash into your home loan can speed up your loan’s life cycle, with the added benefit of saving money in the long run. Shorter loans mean less interest.
But here’s the thing: not all loans allow you to pay in advance, and there are other things to consider too. Get set to save thousands by setting yourself up with the right loan.
In a time of historically low interest rates, paying off your loan faster is (theoretically) easier than ever. Imagine rates were at 2 per cent points higher than they are today, the extra interest on an $800,000 loan would be $1333 a month approx to your repayments. That’s a lot of smashed avo!
So every time you pay more than your required amount, it’s more than just knocking off some of the actual debt (‘principal’); it also translates to less interest overall and a shorter period of time before you actually own your house – debt free!
Most borrowers will, over their working lives, increase the amount they are able to earn. There may also be inheritances on the horizon. Being able to pay off your loan faster makes a lot of sense at these times. And that’s why setting yourself up with right type of loan is vital.
Variable versus fixed rates
Generally speaking, almost all basic variable or variable-rate products allow for extra repayments, above the minimum amount required by the lender.
On the other hand, many fixed-rate loans don’t allow for extra payments. Those that do will typically have other restrictions to the loan conditions.
For example, fixed-rate loans that do allow extra payments usually don’t offer redraw. As we’ve explained previously, ‘redraw’ is simply the ability to get access to any extra repayments you’ve already made if you need the extra cash for another reason. Other will actually charge additional fees to their customers for making these extra payments
While we certainly have some customers who prefer the month-to-month certainty of a fixed repayment amount, we usually suggest our clients look hard at variable-rate loans with redraw built in. (Perhaps even a combination of both fixed and variable with a split loan option, talk to us for further information).
Consider your own circumstances
There are a few things to consider if you want to pay your loan off sooner. First, you need to decide whether you even want to pay your loan off faster. You may prefer to travel more or need to concentrate your money on other things, such as looking after family members.
You then need some confidence that you’ll be disciplined enough to spend extra on the loan rather than other luxuries. Perhaps you take a holiday every two years instead of one? Perhaps you commit to paying any tax return straight onto your loan.
Understanding your own saving and spending behaviour is important.
Talk to us
Call us at Mortgage Broker Group and we’ll help you assess the different strategies available to pay off your loan faster and save. It may be a matter of simply finding the right variable-rate for you, or it may involve paying off other higher-interest debts first.
At no cost to you, we’ll help you weigh up the options, find a great loan for you, and set you on course to be debt-free sooner.