In this post I’m going to show you how to pay off your 30 year home loan faster.
You’ll also see how I used these strategies to chunk off 6 years from my own home loan by maintaining your current home loan repayments!
It gets better:
All of these strategies are working GREAT right now (in 2019).
With that, here are the strategies you’re going to learn about:
- 1. Get the Right Type of Loan
- 2. Don’t use interest-only repayments
- 3. Act like your loan has a higher interest rate
- 4. Use a 100% Offset Account
- 5. Get your budget in order
- 6. Check out other banks
- 7. Think about investing
- 8. Cut up your loan repayment
- 9. Don’t add fees to your loan
- 10. Never avoid non-bank lenders
1. Get the Right Type of Loan
Here’s the deal:
Before you can even think about paying your home loan off faster, you need to have a home loan type that will allow additional repayments.
For example, a fixed rate home loan only allows a maximum of $10,000 in extra repayments per year.
This is a huge problem…
If you have committed to a long-term fixed rate you may have hindered your ability to make extra repayments to your loan.
Fortunately, there’s a simple solution to this problem: The split rate home loan.
Here’s the step-by-step process:
- Decide how you would like to split your home loan (50/50, 70/30, 80/20, etc)
- Contact your mortgage broker and let them know you’d like to split your home loan
- Complete a variation to split your home loan
- Double check with your bank your 100% offset account is correctly connected to the variable split
2. Don’t use interest-only repayments
This is a simple strategy that can literally cut $37,931 in additional interest from your loan:
Although less common today, many lenders will offer the opportunity to pay interest only on a loan.
The benefits are that you have lower monthly home loan repayments.
The downside is that it can cost you tens of thousands of dollars and you won’t pay down any principal on your loan.
Paying principal and interest makes sure you can get your loan cleared, reducing the effects of compounding interest and repaying your loan much faster.
As Albert Einstein said, compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. Compound interest is the most powerful force in the universe.
3. Act like your loan has a higher interest rate
This is one of the BEST ways to pay off your home loan faster.
In fact, this single strategy can help you pay down your home loan 10 years faster:
Using the ASIC repayment calculator work out what your repayments would be if interest rates went to 8%.
In my case, they would almost double to $4,196 per month, being an additional $1,557 per month.
This increased repayment would save 12 years from my loan term, and reduce interest costs by $153,527.
Yeah, that’s a lot of money.
Another added benefit from this technique is that if interest rates go up in the future you won’t be caught out…
Because you are already making extra repayments!
4. Use a 100% Offset Account
It’s no secret that 100% offset accounts are the best way to pay off your home loan faster.
Every dollar in the offset account is reducing your home loan balance.
Your pay, gifts, bonuses, tax refunds…
That said, there are still heaps of people who do not fully take advantage of a 100% offset account.
As you can see in the example above, every dollar in the offset reduces how much interest is paid on your home loan.
This is also the case if your loan has redraw…
And it doesn’t need to be $20,000, it can be as small as $1.
If you aren’t using an offset account, get in touch with your mortgage broker today to look at switching your home loan type or at least check to see if you have a redraw facility.
Read More: 13 Mistakes Nearly all First homebuyer make
5. Get your budget in order
Doing a budget is simple:
Half the battle with budgeting is just being aware.
All you need to do is:
- ✅ Download either app
- ✅ Insert your bank account feeds
- ✅ Let the app start categorising expenses
- ✅ And being aware of what you are spending your money on
Read More: 11 Hidden Costs of Buying a Home in Brisbane
6. Check out other banks
Other banks can cut your interest costs by THOUSANDS.
(In fact, one survey found that after refinancing there was an average saving of $87.14 per month)
Does this mean you should go out and refinance your home loan today?
Instead, I recommend talking to your mortgage broker to see what deals are available or if your existing bank is willing to reduce your current interest rate.
This strategy works so well that even a small reduction of 0.75% can pay off your home loan 39 months earlier.
Almost 4 years!!!!!
There are also some banks that offer rebates and cover the fees for switching your home loan.
7. Think about investing
So you have paid down a big chunk of your home loan.
It’s time to think about investing.
Keep in mind that this can be a risky option and you should always talk to a professional like a financial adviser first.
If you want to invest in property, you could even consider Rentvesting.
Rentvesting is living where you want and investing where you can afford.
Alternately you can look at investing in shares.
There are lots of different ways to invest in shares:
- 📈 Buying shares directly
- 📈 Buying shares using an Exchange Traded Fund (ETC)
- 📈 Buying shares using an index managed fund
- 📈 Buying shares using an active fund manager
- 📈 And many more.
8. Cut up your loan repayment
This is similar to technique #3 from this guide…
…with an important twist.
Instead of just paying extra, you split your existing monthly repayment.
In other words:
You take your monthly payment, divide it by 2 and make it each fortnight.
Let’s assume your minimum monthly repayment is $1,000.
Cut this payment in half, $500 and make it every fortnight:
You end up making 1 extra repayment per month because there are 26 fortnights vs. 12 months!
And in a year pay off your loan with one extra monthly repayment or $1,000 extra…
…And this seemingly small amount cuts 4 years and 9 months from your loan.
Read More: 7 Ways of Creating Equity Faster
9. Don’t add fees to your loan
Here’s the truth:
If you want to get a home loan, you are going to have to pay some bank fees.
As we’ve covered before, bank fees can add up to $500-600 per application.
- ✅ Loan application/Establishment Fees – some lenders charge on the initial drawdown of your loan
- ✅ Document Preparation fees – Lenders may charge this to prepare your home loan contracts before approval
- ✅ Bank valuation fees – usually waived but if you need a valuation they may charge you
- ✅ Other fees – Annual Fees! – sneaky annual fees can cost up to $400 per year.
With that being said, the most expensive fee you can pay when getting a loan is lenders mortgage insurance (LMI).
Lenders Mortgage Insurance can be in the 10’s of thousands.
While it might not always be possible to pay the lenders mortgage insurance costs up front, it is worth considering.
In the example above, $15,741 in lenders mortgage insurance carried over 30 years costs…
Almost double in interest!
Read More: 11 Hidden Costs of Buying in Brisbane
10. Never avoid non-bank lenders
People love security.
(No surprise there)
But what might surprise you is: the big banks are just as secure as the smaller lenders.
According to ASIC: The Australian Government has guaranteed deposits up to $250,000 in Authorised Deposit-taking Institutions (ADIs) such as your bank,or . This means that this money is guaranteed if anything happens to the ADI.
What does that mean for you as a borrower?
Well, the fact is that lots of smaller lenders offer great discounts because they are in a strong financial position and need to compete against the big banks.
The added benefit of this is that with the lower interest rates available at smaller lenders…
The faster you will be able to pay off your loan!
Read More: 7 Ways of Creating Home Equity Faster
Did I miss anything?
Now I’d like to hear from you:
Which tip from today’s post are you going to try first?
Or maybe I didn’t mention one of your favourite tips on paying off your home loan faster?
Either way, let me know by leaving a comment below right now.
Help this is all confusing
At Hunter Galloway we help clients get The best Home Loans in Brisbane in this competitive market, we give you the actual strategies that have helped other home buyers like you secure a property when there have been 5 other offers on the table! Enquire online or give us a call on 1300 088 065.