When you first take out a home loan, you’re probably looking at a loan term of 25 to 30 years. But there are lots of strategies you can use to get ahead with your home loan and clear the slate sooner.
The beauty of paying off your loan ahead of schedule is the opportunity to pocket big savings on loan interest. And with your loan paid out, you have more cash to spend on whatever you choose.
Why pay off a home loan sooner?
Interest rates on home loans are usually the lowest across all types of credit. The catch is that a home loan is a very long term debt, and this can see the interest cost escalate over time.
Paying your loan off sooner will reduce this cost, and it doesn’t have to mean scrimping on your lifestyle today.
Five simple steps to pay off your loan sooner.
Pay a bit extra.
Adding a little extra to your regular loan repayments will help to pay off the balance sooner. Even small additional payments can generate big savings over time.
Extra payments come straight off your loan balance. This lowers the interest component of your next repayment, so more of that payment goes towards paying off your loan. In this way, you swing the loan pendulum in your favour.
It’s important to look for a home loan that doesn’t charge for extra payments. With a Defence Bank variable rate home loan, additional repayments are fee-free so it won’t cost you anything to forge ahead with your loan.
To see how much you could save with extra payments, head to our Extra Repayments Calculator.
Make a lump sum payment.
From time to time you may receive a lump sum, perhaps an annual tax refund or a work bonus. Put these windfalls to work by making a lump payment on your home loan. It’s money you haven’t factored into your budget, so you won’t miss it. But it can produce valuable savings on loan interest.
Our Lump Sum Repayment Calculator can show just how much you could save. Make it an annual habit to tip regular windfalls into your loan to fast-track your way to mortgage freedom.
Go easy on redraw.
It’s good to know any extra loan payments can usually be redrawn from a variable rate home loan. It means the cash is there if you need funds in an emergency.
Even better, with a Defence Bank home loan, redraw is fee-free.
However, it’s worth aiming to keep redraws to a minimum. Withdrawing extra payments from your loan will push the balance back up. This can see you lose some of the headway you’ve made by paying down the loan sooner.
Keep repayments the same if the loan rate falls.
During the course of your home loan, interest rates are likely to rise and fall. If you have a variable rate loan, a fall in rates will see your regular repayments reduce. By keeping the repayments at their former (higher rate) level, you will automatically make extra payments.
As your budget has already factored in the higher rate repayments, it’s an effortless way to move ahead with your loan.
Consider an offset home loan.
An offset account is a separate cash account linked to your loan. You won’t receive interest on the offset account. However, the balance is deducted from (or offset against) your home loan when interest charges are calculated. The repayments remain the same, but the offset account can help to lower the interest component.
In this way, an offset account lets you put spare cash to work saving on interest costs and whittling away the loan balance.
Be sure to look for a 100% offset loan, so that the full value of the offset account goes towards reducing interest costs.
Important note: This information is of a general nature and is not intended to be relied on by you as advice in any particular matter. You should contact us at Defence Bank to discuss how this information may apply to your circumstances.