To save or to pay down your home loan, that is the question. Ok, so it’s not Shakespearean levels of contemplation – but it’s still a big decision facing many Australian families right now. Let’s take a look at what the majority of home owners are leaning toward.
A growing number of home owners have given up waiting for rate cuts and are making home loan savings of their own – by knuckling down to reduce their mortgage balance.
A survey by Agile Market Intelligence found 69% of home owners – the highest percentage this year – are making it their top priority to get ahead with their home loan.
Let’s take a look at why so many are deciding to do so.
The interest rate you pay on a home loan will most likely be higher than the rate you’ll earn on a separate savings account.
No surprise there – charging loan interest is one of the key ways banks make money.
So, by paying down your loan sooner, you can typically save more in loan interest charges than the interest you could earn on personal savings.
Better still, the sooner you start paying down your loan, the more interest you can save over time, and the earlier you become debt-free.
That’s because every extra dollar that goes into your home loan comes straight off the loan balance. This in turn lowers the next month’s interest charge.
But as your regular repayments stay the same, more of the next month’s repayment goes towards reducing the loan balance.
In this way, the loan pendulum can start to swing more in your favour, and you can really get stuck into reducing your home loan balance.
When you reduce the amount owing on your loan, your home equity usually increases (so long as the value of your home doesn’t dip in value).
And the more equity you have, the more opportunity you could have to refinance to a lower interest rate loan (there’s more savings for you) or to tap into your home equity to achieve other goals, such as investing in a rental property.
We understand that today’s high living costs mean home owners don’t always have a lot of spare cash to throw at their mortgage.
That’s okay.
It’s possible to pay off your loan sooner – and save on interest charges – even when cash is tight.
Here are some ideas to get you started.
Paying half your monthly repayments every fortnight (rather than monthly) means you’ll end up repaying the equivalent of 13 monthly instalments each year instead of 12.
This extra month’s worth of repayments can make further inroads on your home loan balance, and paying fortnightly may also be easier on your cash flow, especially if you can sync repayments up with paydays.
Lump sum payments on your home loan can accelerate its reduction.
That can make it worth depositing tax refunds, end-of-year work bonuses, or other ‘windfalls’ straight into your home loan. Chances are you’ll never miss what you’ve never had.
An offset account can let you use spare cash to pay off your loan sooner.
The balance of the linked offset account is deducted from your loan balance when monthly interest is calculated. This reduces the monthly interest charge, so more of each repayment whittles away the loan principal.
Talk to us to know if an offset account is suitable for you.
No matter how hard you work to pay off your home loan sooner, you could be behind the eight ball if you’re paying a higher interest rate than necessary.
For context, the Reserve Bank says the average variable rate is about 5.5%. But according to Mozo, there are plenty of lenders offering a lower rate.
That’s why it’s important not to assume you are paying a competitive rate.
Call us to organise a home loan review. We can confirm the rate you’re currently paying, and let you know if you could save by switching to a loan with a more competitive rate.
Whether you signed up for a 25- or 30-year mortgage, you don’t have to chip away at your home loan for this amount of time.
And really, how good would it be to become mortgage-free sooner?
If paying down your loan is a personal goal, talk to us to find out more ways you could get ahead with your loan.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to your circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
Paul da Silva
Director & Senior Mortgage Advisor
