27 Mar How to Pay Down Your Home Loan Faster
For decades, the advice our parents handed down to us, was you must pay down both principal and interest on your home loan, or you’d never actually own your own home.
As a result, a 30-year P&I loan with a standard variable rate became the go-to for many owner-occupiers and investors.
However, as the mortgage market in Australia changed and the value of a good mortgage broker quickly became more apparent – both investors and homeowners started to discover that perhaps there would be a better way to look at this type of loan. And how they could potentially pay down their loans faster and save thousands of dollars in interest in the process.
The best mortgage brokers in Melbourne quickly realised that you could potentially significantly increase your wealth in the long run, if you examined the different options for managing your repayments.
Many new investors and homeowners get a little nervous when they look at how much interest they will potentially pay over the course of a 30-year loan.
On a $500,000, 30-year, P&I Loan, the interest expenses would very nearly be the same as the actual loan amount itself. So there is a good reason why you need the best mortgage broker you can find on your side.
To some degree, banks have been perpetuation the idea that a principal and interest loan will help you pay down your loan faster and you’ll save more money on interest. The best mortgage brokers in Melbourne will certainly have a very different idea when it comes to what you could potentially do.
But at the same time, it is important to note that there is never a one size fits all approach. Every homeowner or investor has different goals and it’s important to talk to a good mortgage broker about exactly what it is you are trying to achieve. They will then be able to tailor a solution to fit your goals.
So how can the best mortgage brokers help you pay down your loan faster?
Increasing Loan Repayment Frequency
It is commonly accepted that you can increase your repayment frequency and that will help pay off your loan faster.
For the most part, this accurate. By changing from a monthly repayment to a fortnightly, you could quickly slash four years off a 25-year loan term.
Effectively you’re making 26 payments per year, versus 12, so the principal amount is reduced and interest is reduced along the way.
Making Additional Payments
In a similar fashion you can cut down the total interest you are paying on a loan considerably, by making either additional lump sum payments, or paying more than the minimum.
It has a similar effect as paying down the loan more frequently and you are in essence cutting the loan term as well.
However, both these methods are limited by the fact that you are paying down your principal and interest and having to make repayments. That’s not something everyone can do easily.
What the Best Mortgage Broker Can Do for You
One of the best ways to help accelerate your home loan and pay less interest is by adding an offset account.
Effectively an offset account offsets the balance of your mortgage – which reduces the interest expenses you pay.
For example, if you have a $300,000 mortgage, you could park excess funds in your offset account and the difference between those two accounts would be the amount you are effectively borrowing.
Let’s say you have $100,000 in your offset account, then your mortgage is effectively reduced to $200,000. At 5% interest, you would be only paying $10,000 interest per year.
At the same time, these funds will be earning more interest than you would receive in a term deposit as the interest rate on a mortgage is always going to be higher.
Saving Thousands with a Credit Card
We must also note that interest is calculated daily and charged in arrears.
So a clever thing to do here is to park all your excess money in an offset account while spending money each month on a credit card. Then paying off that money before the end of the interest free period.
That way, you are earning money by way of saving interest on your mortgage payments while letting the credit card company pay for your expenses. All the while, you’re also collecting interest.
These are the kind of things the best mortgage brokers in Melbourne can help you with.
The best mortgage brokers offer far more than finding you a low interest rate. They can help you structure your finances so that you pay down your loan faster and save tens (if not hundreds) of thousands of dollars in the process.
If you think you would like to save money on your home loan give us a call today.