How to pay off your home loan early

By accelerating your mortgage payments, you can take control of your financial future and unlock the benefits of early repayment.

Why pay off your home loan faster –

whether you’re a first-time home buyer, a single parent, or anyone looking to secure a brighter future. By boosting your mortgage repayments, you’re not just inching closer to being mortgage-free; you’re unlocking a world of possibilities. Imagine the joy of that long-awaited overseas holiday or the satisfaction of supporting your children through their education sooner than planned.

1.      Open and link an offset account to your home loan

A mortgage offset account is a savings account or transaction account linked to your home loan.

By keeping your savings in this account, you can reduce the amount of interest you pay on your home loan. The money in your offset account is offset from the outstanding balance of your home loan before the interest is calculated. This means that you pay less interest over time, which can help you save money in the long run. To make the most of this, consider having your salary paid into your offset account and using a credit card to cover your day-to-day expenses. This is a low-cost way of keeping money in your offset account.

However, it’s important to remember to pay your credit card bill in full or before the end of the interest-free period. By doing so, you can maximize your savings and avoid paying unnecessary interest charges. If you have an offset account or are thinking about setting one up, be sure to check out our article on how to pay less interest on your home loan with an offset.

Our expert guidance and personalized solutions can help you make the most of your offset account and achieve your financial goals.

2.     Changing the repayment frequency

Changing your repayment cycle can have significant benefits, such as making extra repayments. By switching to fortnightly repayments, you can pay off your loan faster and save money in the long run.

Let’s say your monthly repayments are 2,000. By the end of the year, you’ll have repaid 24,000 not accounting for interest. But if you change this to 1,000 a fortnight, by the end of the year, you’ll have repaid 26,000.

This extra amount comes directly off your loan principal and reduces the amount on which future interest will be calculated. As the interest is less, more of your repayment goes towards paying off the principal of your loan, so your mortgage gets paid off sooner.

3.      Make extra repayments

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.

A tax return, a work bonus, a birthday present, a sale on eBay – make a habit of ploughing every lump sum you receive into your mortgage. 

4.      Improve your spending habits

We believe that small steps can lead to big savings. That’s why we encourage our clients to take a realistic but tough approach to their finances. By making changes that you can live with for the next five years, you can start building a better financial future for yourself.

One way to achieve this is by saving and investing your money wisely. If you haven’t already, we recommend opening a mortgage account with your lender. By arranging to have regular payments automatically deposited into your account, you can start building up your savings without even thinking about it.

We understand that cutting back on expenses can be challenging, but even small changes can make a big difference. For example, did you know that skipping just one cup of takeaway coffee every working day could save you up to 1,000 a year? By keeping an eye out for new opportunities and better deals on essentials such as gas and electricity, you can make your money go further.

5.      Rent out that extra room

Renting out your spare room can be a lucrative strategy, and we’re here to guide you every step of the way. By leveraging accommodation websites like airbnb.com.au for short-term lets or opting for a longer-term arrangement with a student, you can significantly reduce your repayment timeline.

Before embarking on this journey, it’s crucial to check local regulations and secure any necessary permissions, especially if you live in an apartment where body corporate rules may apply. Index Finance’s client-focused approach ensures that you are well-informed and supported throughout the process.

Not only can renting out a spare room help you financially, but it also opens the door to meeting new and interesting individuals. Imagine the possibilities of forging meaningful connections while making tangible progress towards owning your home outright.

6.      Fixed Vs Variable rate loans

When it comes to borrowing money, choosing between fixed and variable rates can be a difficult decision. Both options have their advantages and disadvantages.

Fixed rates provide the security of knowing exactly how much your repayments will be each month, which can make budgeting easier. However, they offer less flexibility than variable rates, and you may face break fees if you want to switch to a variable rate before the end of the fixed term.

Variable rates, on the other hand, allow for unlimited extra repayments without any fees. This can be beneficial if you want to pay off your loan faster. However, it also means your repayments could increase if interest rates rise.

At Index Finance, we offer the option to switch from fixed to variable after the fixed term ends, providing greater flexibility. We also offer the option to split your loan between fixed and variable rates, allowing you to take advantage of both options. It’s essential to consider any limits on extra repayments for fixed loans before making any additional payments.

Timing is also crucial when deciding between fixed and variable rates. If you want to pay off more of your loan, shifting a portion of it to variable rates could be advantageous. Our team at Index Finance is here to guide you through the decision-making process and provide tailored solutions to meet your specific needs.

7.      Reduce your payments as a last resort

We understand that managing loan repayments can be challenging, especially when interest rates fluctuate. However, we urge you to consider maintaining or increasing your repayments whenever possible.

Here are some tips to help you manage your loan repayments more effectively:

1. Keep your repayments as they are: When interest rates fall, it’s tempting to reduce your repayments. However, think about maintaining your repayments at their current level. This will help you pay off your loan sooner and save money in the long run.

2. Add a little extra to your repayments: If interest rates remain steady for a while, consider adding an extra $20 to your regular repayments. It may not seem like much, but it can add up over time.

3. Research interest-only loans: If you’re considering an interest-only loan structure to reduce your payments, we recommend doing your research first. The Australian Securities and Investments Commission (ASIC) has some useful information for customers considering this type of loan structure. Check out their MoneySmart guidance for easy-to-follow infographics highlighting the pitfalls and benefits of interest-only loans.

At Index Finance, we’re committed to helping you navigate the borrowing process with confidence. If you have any questions or would like personalized guidance on managing your loan repayments, please don’t hesitate to reach out to our team.

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 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.