How to repay your home loan quicker and take advantage of low interest rates.
Australian mortgage interest rates have reached the lowest level in history, which is an opportunity for homeowners, as lower rates make mortgage repayments more affordable.
According to the Reserve Bank of Australia's and PM Scott Morrison update, low rates are here to stay and "we could expect them to be for at least three years, if not more".
Generally speaking, a decrease in interest rates increases personal disposable income, encourages investments, and it can be a chance for you to pay off your mortgage faster.
If you are looking for solutions to pay off your mortgage quicker, pay attention to these tips:
1. Making higher monthly repayments
Interest rates have a significant impact when you finance a property, especially in the long term. A comparison between Aug 2018 and Aug 2020 of a $400,000 mortgage, shows that monthly repayments for contracts signed today are approximately $600 cheaper due to the decrease on interest rates in Australia (from 5.35% to 2.65%)
This simulation was made with moneysmart.gov.au. You can replicate it here
Imagine someone who bought a house expecting to pay $2,234 every month and is now paying only $1,612. Considering that the borrower's financial situation has remained stable and is committed with the same monthly savings, this can represent an opportunity to start making higher repayments and paying off the mortgage much earlier.
In the above example, if the borrower continues to maintain the monthly repayments to $2,234 instead of the minimum required $1,612, the borrower can repay the mortgage in 19 years and 1 month instead of 30 years. That's more than ten years earlier and saving of roughly $70,000 in bank interest.
2. Making extra repayments
Depending upon the borrower's capability to save, any extra repayments will help reduce the outstanding principal much faster and hence will reduce the overall interest repayments. As you can see from the first example (with lower interest rates), if the borrower continues to make extra repayments there was a possibility of reducing the mortgage timeframe from 30 years to 19 years and 1 month, also saving on more than $70,000 interest payments.
This approach is similar to making higher repayments.
In both approaches, the extra repayments made can provide cushioning in case interest rises in the future or if you are considering investing.
3. Switching monthly to fortnightly repayments
Instead of paying the mortgage instalments once per month, borrowers can consider making the payments fortnightly or even weekly. This will help reduce the principal at a much faster rate, and the borrower will again end up saving in interest costs.
For example, if the monthly repayment is $2,000 over a 12-month period total repayments will be $24,000. By paying $1,000 a fortnight instead, you will pay $26,000 in repayment each year. Simply because there are 26 fortnights in a year. So, at the end of the year, you will make an additional month’s repayment each year.
4. Finding a lower interest rate mortgage
If you are stuck on a higher rate mortgage, the current environment can be an excellent opportunity to refinance your mortgage.
There are other smart ways to ensure you get the best out of your mortgage, e.g. using the cashback incentives from banks while refinancing, etc.
5. Using Offset Account
An offset account is simply your savings/day to day account with an added benefit of saving you interest on your loan. It is linked with your mortgage account.
The balance that you keep in the offset account will reduce the amount of interest you pay on your loan. For example, if you have a loan of $400,000 and $30,000 in your offset account, the interest will only be charged on $370,000. This not only helps you to save money on interest you pay but also helps you pay off your mortgage faster.
Where to from here
If you want to find out which strategy is right for you or want us to help you get your current loans reviewed, we can help you. In our extended partner network, we have several mortgage brokers and home lending managers whom we can work with and find the best solution for your situation.
At SONI, we help you lay the solid foundation for your finances by implementing tailor made strategies that can not only help you pay off your home a lot earlier but also help you build a multi-million-dollar portfolio of investment properties.
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