Tips and hints for paying off your home loan sooner
Australian household debt is now four times what is was 27 years ago, rising from $60,000 to $245,000 and a new report has found mortgages make up the lion’s share of this debt, at 56 per cent.
The latest AMP.NATSEM report, Buy now pay later: Household debt in Australia, found despite record high debt levels, low interest rates have fuelled our appetite for debt and helped cushion the cash flow impact of repayments. However, there could be storm clouds on the horizon for many Australian families if record low interest rates head north.
So how can homeowners take advantage of a low interest rate environment to pay off the mortgage sooner and avoid falling victim to the burden of hefty debt repayments for the next 30 years?
Make extra repayments
While interest rates are low, consider increasing your monthly mortgage repayments so you can own your home sooner and reduce the interest you pay over the life of the loan. The monthly repayments on a $400,000 mortgage over a 30-year term at 4.75 per cent are around $2,086. Increasing your monthly repayments by $200 could save you $68,702 in interest. Finding extra money each month might not be easy, but it’s surprising how much people can reduce their incidental spending if they take a closer look at their household budget
Pay fortnightly instead of monthly
On the same $400,000 mortgage, a person can cut four years and six months off the life of their loan and save $61,416 in interest, simply by swapping to fortnightly repayments. The loan is reduced faster as there are 26 fortnightly repayments each year, instead of 12 monthly repayments.
Keep savings in a mortgage-offset account
Many people choose to park their savings in high interest online accounts or term deposits, and while these options are useful, people could also consider dropping their savings into a 100 per cent mortgage-offset account. Any money in the offset account will be working to reduce interest and pay the mortgage off faster. Another advantage of mortgage-offset accounts is that the cash can be easily accessed if necessary.
Shop around
Shopping around could save you thousands of dollars, however be mindful that you may be charged a fee if you switch lenders. Before making the switch, it’s important to consider whether this cost will outweigh the potential savings of a lower interest rate, and how long it will take to break even.
