So you’ve gotten yourself the best home-loan deal that you can. Now let’s talk about paying it off.
Bottom line — you need to make more repayments.
An extra $1,000 paid off the loan in the first year or two could be equivalent to you paying $2,000 in 20 years' time.
Savings can be placed into a mortgage offset account, where they can be matched against your home loan, and interest is only charged on your loan for the reduced amount.
Start by creating a budget
Flowing from your budget will be savings. Put these into a mortgage offset account, where the savings can be matched against your home loan, and interest is only charged on your loan for the reduced amount.
So, if you have a $300,000 loan, and have $50,000 in the offset account, then your home loan would only be charged interest on $250,000.
The gain arises because your regular loan repayments remain the same.
If the interest charged on the loan is less — because of the money sitting in the offset account — then more of each repayment will come off the principal, accelerating the clearance of your debt.
Can you bump up your repayments? Maybe it’s as simple as rounding it up to the nearest $100.
Perhaps use a pay rise for this purpose. Instead of pocketing the extra cash, increase your home-loan repayments instead.
You’ll still have the same money to spend as you always did but you’ll be saving thousands of dollars in interest over the life of your loan.
Many of us get paid fortnightly, yet lenders typically quote repayments as monthly figures. Paying your loan fortnightly, instead of monthly, can have a big impact.
For example, if you have a $300,000 loan — interest rate of 4.05 per cent — with monthly repayments of $2500, by simply paying $1250 per fortnight instead, you cut just more than a year off the loan term and save almost $10,000 in interest.
This is because while there are 12 months in a year, there are 26 fortnights. You end up making one additional monthly payment each year.
Avoid interest only
Avoid interest-only loans. The interest rates are currently higher and you will end up paying far more interest over the life of the loan.
Avoid credit cards
Be wary of the strategy where you live off your credit card, your wage goes into your home loan, and the credit card gets automatically cleared at the end of each month via a withdrawal from the loan.
While on paper this can be shown to produce savings, I’ve yet to come across a single person for whom this plan has worked.
The problem is the credit card is a bottomless pit. There’s no restraint.
I’ve seen instances where people’s debt has gone up over the course of a year rather than down.
Paul Benson is a financial planner and creator of the podcast Financial Autonomy
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