7 Strategies for Paying Off Your Home Loan Sooner

For many people, a high priority is to pay off their home loan as quickly as possible, but how many actually have a plan to achieve this.

Paying off your home loan can provide a sense of freedom, and knowing you own a bigger portion of your home gives us a sense of pride.

Below are some examples of strategies that can assist you in paying off your home loan sooner, and possibly saving you thousands of dollars.

Cut your spending

The very first thing to consider if you hope to pay off your variable rate loan early is a reduction in spending. Tweaking what you spend each month will help to free up extra funds. Once you have additional money available, you can increase your loan payments. If you are unsure where you can reduce your spending, your best bet is to set up a monthly budget to carefully look at what you are spending money on to find where you can save.

Consolidate debts to save money

Many people that have a home loan also have additional debt. This may be in the form of a personal loan, credit card or other debt. These types of loans traditionally have a higher interest rate, and shorter term to repay the loan.

A strategy to reduce debt quicker, and save on interest costs is to consolidate the debts (repay the other loans) using the home loan. The key to this strategy is to continue making the same repayments as you were prior to the consolidation, and now with a lower interest rate (as the lower interest rate on the home loan will apply to all their debts), the principal balance should be reducing at a quicker rate.

Open an Offset Account

Another option to help you save money and pay off your loan faster is to open an offset account. An offset account generally will reduce the amount of interest you need to pay on your principal loan balance. For example, if your offset account has a balance of $50,000 and your home loan balance is $300,000, your loan interest would be calculated on the difference, being $250,000.

The interest saved by having funds in an offset account is usually higher than would be received in a savings account, and is not subject to income tax.

Not only will you have immediate access to your money, but you will save on the amount of interest payable, and pay off your home loan sooner.

Increase the frequency of your repayments

You could save on interest and pay off your mortgage sooner by making fortnightly or weekly repayments instead of monthly, and in turn build equity in your home.

If you choose fortnightly repayments you will pay half of your monthly repayments each fortnight. Because there are 26 fortnights every year, this is equivalent to making an extra month’s repayment each year. This means you’ll build equity in your home more quickly, plus pay off your loan sooner and save in interest.

Make larger repayments

You also have the choice of paying more than your required monthly repayment amount to pay your mortgage off and build equity. This way you could reduce your mortgage term and save on interest.

Making larger repayments than required is a type of forced saving, as your funds have been diverted to your mortgage, leaving less to spend on everyday expenses.

Make lump sum payments

If you can make lump sum repayments your total repayment amount could end up being less meaning you could own your home sooner. An example may be a top-up using funds from an annual tax return.

The sooner you can make additional payments the better, as the time at which you pay the most interest is in the first years of your loan, the earlier you can get onto reducing the principal of your home loan, the better off you’ll be, because your interest will start reducing right away.

Lower your interest rate

Traditionally, people do not shop around when it comes to taking out a loan, and less so once they have an established mortgage. Interest rates vary amongst lenders, and ensuring you are not paying more than you should be can save you thousands of dollars.

In addition to this, you should ensure the loan you have is suitable to your needs. There are different types of loans around; some being Principal & Interest loans – in which you repay the principal and interest over a nominated period of time, whilst others require you to only pay the interest component, an example of this may be a Line of Credit.

Please speak to a qualified financial adviser at Financial Freedom By Design to discuss strategies that can help you play off your home loan sooner.