Ways to repay your home loan more quickly

 Ways to repay your home loan more quickly

Home loan repayments can be a constant challenge or irritation to any home owner. While you will eventually have to pay back the whole of your mortgage amount, there are a few ways you can make it easier to keep up with your repayment obligations and actually paying off your home more quickly.

1. Offset accounts

By linking a deposit account to your home loan account, any funds you have in the deposit account work to offset the interest you are paying on your home loan. Over time, money in your offset account can and the home loan interest this saves, help to reduce the loan principal more quickly, allowing you to pay off your loan sooner and build up equity.
Let’s say you may have a home loan of $200,000 at 7.2% p.a. and an offset account with $30,000 in it. The offset account balance is set off against the home loan, meaning that interest is calculated against $170,000, rather than $200,000. Thus your repayments reduce more of the principal each time, allowing you to repay the loan over a shorter time period.

2. Honeymoon rates

Many lenders offer “honeymoon rates” as a marketing tool to attract borrowers to their products. Basically, the lender will grant a cheaper rate of interest for an initial period (usually 6-12 months) after which time the rate reverts to the standard variable rate of that institution.
This system appeals to borrowers who plan to attack the loan early by making extra payments in first months to help reduce principal. Honeymoon rates are tempting, but watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the available features to offset the lower interest rate. This can result in limited flexibility or higher charges over the term of the loan.

3. Debt consolidation

If interest rates rise on your home loan, it’s guaranteed that credit card and personal loan rates will also climb. This can be crippling, as the interest rates on your credit cards and personal loans are usually much higher than the interest rate on your home loan. To alleviate these higher repayments, many lenders will allow you to consolidate or refinance all of your debt under the one roof of your home loan.
This means that instead of paying up to 20% p.a. on your credit card or personal loan, you can transfer these debts to your home loan and pay them off at the current variable rates (generally around 7.25% to 7.5% p.a.).

4. Additional repayments

Whichever way you decide to go with your home loan, don't forget to consider the advantages gained through additional repayments.
Say you have a loan of $300,000 at 7.25% p.a. that requires a minimum repayment of $2,168 per month over 25 years. By contributing an extra $100 per month (that’ s just $25 a week), you will see the loan paid off 2 years, 9 months earlier with an interest saving of around $46,000. Even if you can’t pay extra, making weekly or fortnightly payments rather than monthly will also reduce the loan term and your interest costs.
Whether you make regular payments or irregular one-off payments whenever you have some spare money, the financial benefits can be considerable – and you’ll be debt free sooner.

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