The mortgage-free dream
Both fixed and variable rate home loans have their pros and cons. Put your salary straight into a savings account and watch it grow, rather than disappear into your home loan?
While most mortgages have a 30-year term, there's no reason you can't pay it off quicker. But sometimes the loan you choose can impact how easy that’s going to be.
For instance, if you have a fixed-rate home loan, you can make additional repayments up to $20,000, but after that you may incur economic cost.
Variable versus fixed rate loans
Both have their pros and cons. If you want to pay off your loan faster, you might opt for a variable rate over fixed. It's more flexible, letting you make unlimited extra repayments at no cost.
But if you have a fixed-rate loan now, you’re not stuck with it forever. Once the fixed term ends, you can roll it over to variable and make extra repayments.
1. Make extra repayments
This one’s easy if you can afford it. If your home loan allows you to make extra repayments it’s as simple as increasing the amount you pay each month. You may need to check with your banker.
You can start small and see what works for you. There’s no point putting too much in and not being able to afford your groceries.
2. Align repayments with your salary
If you get paid fortnightly, change your repayments (minimum or extra) to fortnightly, too. This way, you’ll pay more off your loan each year. How?
Say your monthly repayments are $2,000. By the end of the year, you’ll have repaid $24,000 (not accounting for interest). If you change this to $1,000 a fortnight, by the end of the year you’ll have repaid $26,000. This is because there are 12 months in a year—and 26 fortnights.
Effectively you squeeze in an extra month of payments each year. Even more importantly, over the life of your loan, this can shave a couple of years off.
3. Reduce your payments as a last resort
When variable interest rates fall, some people like to reduce their repayments. It’s tempting, but think about keeping your repayments as they are. It'll mean you end up paying more off your loan sooner.
On the other hand, if rates keep steady for a while, think about adding an extra $20 dollars on top of your normal repayments. It really does add up.
If you’re thinking about applying for an interest-only loan structure to reduce your payments, do your research. Australian Securities and Investments Commission (ASIC) have some useful information for customers using an interest-only repayment period as part of their loan term. Check out their MoneySmart, opens in new window guidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
4. Use lump sums
If you’ve received a lump sum payment—a tax return, work bonus, inheritance or dividend payments — consider diverting these funds to your loan. The feeling of getting closer to being mortgage-free is unbeatable.
5. Use a 100% offset account
Using an offset account is a smart way of saving on your home loan. When you manage it well, you can save substantial amounts of interest.
If you have an offset account or you're thinking about setting one up, check out our article on how to pay less interest on your home loan with an offset. You'll find some helpful tips and things to consider.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.