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Published June 1st 2013
Imagine what you could do on your weekends without a loan
We bought our first house about 19 months ago, with the cost of rent it made sense to be paying off our own modest house at the same rate we were paying in rent, but it was very daunting signing a 30 year loan agreement for a house that was less than perfect.
I noticed over the first 6 months that we were paying nothing off the bulk of the loan, just the interest. So I set about finding ways to bring the home loan amount down quicker without noticing a difference in cash flow.
What I found out was not rocket science, but at the same time not always information disclosed by the big banks as they try and set out the repayment amount and frequency of repayments to benefit their profit margin.
The fastest way to drop thousands payable in the form of interest is to pay weekly. Banks charge interest by the day, so when I changed it to weekly it reduced the span of our loan from 28 years to 19 years, which is a huge amount of money. It also means we pay an extra months home loan repayments annually without noticing. This happens by having the monthly amount divided by 4 weeks, as an example if your loan repayment is $2,000 a month, divide it by 4 and you will be paying $500 a week, however there are 52 weeks in a year so you are paying off an extra 4 weeks in a year.
Have your home loan amount directly debited from your account on the day you are paid each week, it's easier having it taken out more regularly than monthly, as you can budget each week with the money that is remaining in your account.
Give your home loan a health check now and then by comparing what other banks are offering to give you the best deal. If you think you should be getting more out of your home loan, talk to your manager to negotiate a deal or switch lenders if you're unsuccessful . There is a website by Info Choice to help compare different options.
With interest rates at an all time low, use this as an advantage to get ahead by not reducing your repayments when the interest rate drops, this will save you thousands in interest in the long run.
If you know how long you intend to keep your house for, now is a great time to lock in a fixed home loan rate, however be cautious if you sell before your fixed rate has expired as you will be paying thousands back to the bank by breaking the contract. Some banks may have a separate clause regarding this so make sure you ask before locking it in.
Locking your home loan rate in limits the amount of extra repayments you can make and it doesn't offer a redraw option, however if you don't have a problem with that, it's a great option.
Bulk repayments also help you own your home faster, so at tax time, try and put your return straight into your home loan, it's one of the easiest bulk repayments if you haven't already allocated it elsewhere. Likewise if you get any other unexpected sums of money, remembering if your home loan isn't on a fixed interest rate that you can redraw some if you are desperate. But usually it's out of sight, out of mind.
And of course the most obvious would be to pay more on your loan each week than the minimum repayments, even by just a few dollars can make a big difference. As an example if your loan is $300,000 at 5.5% interest rate over 25 years, your weekly minimum repayment would be $424, however if you were to round it up to $450 a week you will save $30,136 or in other terms, enough to buy a new car at the end of your loan.
Depending on the interest rates available, try an offset mortgage account. By putting all your income into the offset account and using a credit card to pay for as much of your expenditure as possible you save interest on every penny set against the mortgage. Then take the money out of the offset account to pay the credit card off in full each month. You must be disciplined though.
You mentioned that "the fastest way to drop thousands payable in the form of interest is to pay weekly". Will the repayment in the form of "interest only" or "capital plus interest"?