The average home loan can last 30 years, and over that time you may pay hundreds of thousands of dollars in interest to your lender.
While we all accept this when we take on a home loan, there are ways to reduce the length of the loan and subsequently, reduce the total interest repaid in the process.
Here are our tips on reducing the length of your home loan.
Make extra repayments
When you take out a home loan, ensure your lender allows extra repayments. Check with your lender as most fixed rate loans limit extra repayments or lump sum repayments.
Extra repayments made will go towards paying off the principal (the amount you borrowed).
Paying off chunks of the principal reduces the amount you owe and with most loans, the less principal you owe, the less interest you’re charged.
This will both reduce the life of the loan, and the interest you are paying off.
Pay fortnightly or weekly
Repaying fortnightly or weekly can help you pay off your mortgage years earlier and save tens of thousands in interest.
Helpful tool: Home loan frequency calculator
Fortnightly repayments
Since there are 12 months in a year, but 26 fortnights and 52 weeks - fortnightly or weekly payments can help you make an extra month’s worth of monthly repayments each year without you even realising it.
Let's say you're looking at taking out a $450,000 home loan for 30 years at an interest rate of 2.50% p.a. You're unsure whether to pay monthly or fortnightly and decide to calculate how much you could save by paying fortnightly.
Assuming the fortnightly principal and interest repayments are exactly half the monthly repayments, here’s how to calculate fortnightly mortgage repayments. Note these examples assume your interest rate never changes, when it most likely will over 30 years.
Paying fortnightly vs monthly: Entire loan term interest savings
|
|
Monthly |
Fortnightly |
|
Repayments per year |
$19,959 |
$21,623 |
|
Total repayments (principal + interest) |
$598,783 |
$582,140 |
|
Total Interest cost |
$148,783 |
132,141 |
|
Total interest saved |
N/A |
$16,643 |
|
Time to pay off loan |
30 years |
26 years, 11 months |
|
Time saved |
N/A |
3 years, 1 month |
Source: Repayment Frequency Calculator.
In this example, deciding to pay off your mortgage fortnightly would help pay off your loan three years and one month earlier compared to paying monthly, but importantly it would also save you more than $16,000 in total interest costs.
Interest accrues daily, so paying weekly will save you more again, by a fractional amount. This can also put you under financial stress if your pay is fortnightly, but your repayments are weekly. Choose the repayment schedule that’s best for you.
Be wary of the fact that some lenders do not calculate the fortnightly repayments to be exactly half that of the monthly repayments (or one quarter for weekly), so be sure to confirm this with the lender before making the switch from monthly to fortnightly (or monthly to weekly).
Use an offset account
A mortgage offset account is a transaction (or savings) account linked to your home loan. The money in this account is “offset” against the balance of your loan, meaning you only pay interest on the difference.
Helpful tools:
To reap the benefits of an offset account and accumulate the most savings, the amount of money deposited into the account must be consistently at a reasonable level.
One of the ways that people manage to maximise the amount in their offset accounts is by putting all of their work income into their offset account and using a credit card for their expenses/purchases made throughout the month. Critically, they then make a lump sum payment from the offset account once a month at the time ‘due’ from their credit card provider to balance the credit card back to $0 (and hence avoiding any interest charges and fees from the credit card itself).
As with many financial product features, there are often certain types of fees and premiums involved. And while saving money long term is the focus here, you have to make sure you do the basic sums to ensure that the fees don’t end up costing you more than the amount you save by reducing the interest bill on your home loan.
Offset accounts can be a great way to save money by reducing the interest you pay on your home loan, but you must maintain a reasonable amount of money in the offset for it to make a difference. By withdrawing the money in the account, you lose the benefits of having it in there, while potentially still paying a higher interest rate.
Split your home loan
A split home loan allows you to get the best of both worlds – fixed and variable. A split loan splits your repayments into a fixed-rate component and a variable-rate component.
At the end of the fixed-rate period (up to five years), that fixed portion of the split loan will often revert to a ‘rollover rate’ usually specified in the terms and conditions. This rate can be higher than the variable component of your home loan, and essentially means you’ll be on two different home loan interest rates for the remainder of the loan term.
This allows you to pay off your mortgage faster as usually the variable part of the home loan allows you to utilise features like offset accounts and extra repayments.
Refinance
Refinancing a mortgage can be an effective way of moving from one home loan to a more suitable one for your needs. For example:
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You might be paying too much in interest
-
You might be paying too much in fees
-
You might want a loan with better features
-
You might want to change home loan types, like from owner-occupier to investor, or from principal and interest to interest-only
When refinancing, you don’t have to take on any extra debt – you can simply refinance the amount left to repay (the ‘principal’). For example, let’s say you’re five years into a $500,000 home loan, with $100,000 repaid so far. If you wanted to refinance to a more suitable loan that had, say, a 15-year loan term, an offset account and a lower mortgage rate, then you would only have to refinance the remaining $400,000.
That’s where our mortgage refinance calculator can help.
Refinance to a better rate with these great home loan options:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure |
Don’t lower your repayments when interest rates fall
This may seem counter intuitive, but when you break it down, continuing with the same repayments even if interest rates fall, means you will be taking bigger chunks out of that hefty principal.
If you can, making the same repayment amounts as you always have, even if interest rates fall, will mean you’re chipping away at the principal amount, meaning less interest charged over time, and paying off your loan quicker in the long run.
Image by Alektas via Unsplash
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