Your home is your most prized asset and the home loan is usually your biggest debt. So you’ll want to reduce it as fast as you can.
Here are seven tips on how to reduce your loan without it breaking your budget.
1. Increase your repayment frequency—go fortnightly
There are 26 fortnights in a year, not 24. So, if you cut your monthly repayments in half and align the repayment date to your pay date, you’ll make an extra fortnightly payment every year without realising. It will help you budget and you’ll be taking more out of your principle (that’s the amount you originally borrowed) every year. And by reducing your principle you’re also reducing the interest charged.
2. Put your pay rise into your loan
You’ve got your budget under control, you’re working hard and congratulations—you got yourself a pay rise. Instead of spending up, increase your repayment. You shouldn’t notice the difference if nothing else has changed, and you can reduce your loan faster, especially when interest rates are relatively low.
3. Give your loan a bonus
If you come into some money, like a work bonus, put it into your home loan. This will make a huge saving as interest is now charged on a lower amount. It takes a nice chunk out of the life of your loan.
4. Bring your debt portfolio down to one loan
Are you paying off credit cards or a personal loan? Do you realise you could be paying less? As your credit card rate and personal loan rates are usually higher than your home loan rate, it makes sense to merge these other loans into your home loan. It also makes sense to add the repayments you were making on those loans on top of your mortgage repayments. This will stop these short-term debts being repaid over the longer life of your home loan.
5. Use an offset account
These are tax-advantaged accounts linked to your home loan. Money sitting in an offset account effectively reduces the loan balance, and repayments are calculated on this lower amount. It doesn’t earn any interest, so it’s a tax-effective way to save and reduce the life of your loan.
Read more about offset accounts here.
6. Use your home loan as a savings account
By parking your savings in your variable-rate home loan, (if no offset account is available) you’re saving in an account which provides tax-free returns. There will be fees each time you withdraw, but these should be compared to the rate it earned in your loan and the amount of tax you would otherwise pay if this money was earning interest.
7. Look into Salary loan accounts
These allow you to use your home loan like an everyday banking account. Your pay goes into the loan, repayments are still withdrawn and you’ll also have a debit card and/or a cashcard linked to this account. Having money sitting in this account before you withdraw it keeps your loan balance low and interest earned goes against your home loan.
Be aware that they tend to charge a higher interest rate than normal loans. If you’re one of those people who spends just about everything you earn, it might not work in your favour. But it could help you change that.
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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.
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