Reduce Home Loan Faster

Many homeowners desire to minimise their mortgage payments by acquiring a lower home loan interest rate. Some want to pay off their loans faster so they may own their property sooner, while others want to reduce their monthly payments. The good news is that you may reduce your home loan payments; in fact, there are many ways to do so. 

Few individuals understand how to reduce home loan interest. If you’re thinking, “How can I lower my mortgage interest?” you’re in luck since this article will show you the several methods you may do it.

What You Should Do Before Getting A Home Loan

The greatest approach to save money on your mortgage is to start with a low interest rate. If you’re still in the early stages of your home loan journey, keep these ideas in mind.

Put down a large down payment or deposit

Pay off as much as you can as soon as feasible. Most lenders demand a house deposit of at least 20% of the property’s value, with others taking as low as 10%.  If you can afford it, consider raising the amount you spend as a deposit on your property to save money in the long term.

Paying more up front means borrowing less. Lenders see borrowers with a lower loan-to-value ratio (LVR) as less risky. Many lenders will provide cheaper interest rates to consumers with an LVR of less than 70% or 80% (with a 20% or 30% deposit) than to borrowers with an LVR of more than 80%.

Furthermore, if you put down 20% or more on your property, you will not be required to pay Lenders Mortgage Insurance. Making a large deposit can save you money in the long run and reduce your interest payments.

Avoid interest-only loans.

For interest-only loans, your monthly payments solely cover the interest on the borrowed amount (also known as the principle). You will only pay interest on your loan for the first few years of its tenure (usually one to five years). When the interest-only term ends, your loan will convert to a principal-and-interest (P&I) house loan. At this point, you will be expected to pay both the principle and interest.

Many borrowers choose interest-only loans, especially for investment properties, since the payments amount is smaller in the early years. However, with an interest-only loan, payback amounts only cover the interest on the principle amount. This implies that you’ll have to pay off the main amount eventually.

If you want to pay off your mortgage quickly, avoid interest-only loans. While repayments will be lower during the interest-only phase, monthly or fortnightly loan repayments will ultimately increase when your loan reverts to principle and interest repayments, since you will be forced to repay the principal amount of your loan over a shorter period of time.

Select a short loan term.

Your loan duration might influence how much interest you pay over the course of your loan. Taking out a loan with a shorter term, such as 15 to 20 years rather than the customary 30 years, will help you pay less interest since you are repaying the loan over a shorter period of time.

The biggest disadvantage of a shorter loan period is higher monthly payments. However, shorter loan periods often save you more money in the long run since you pay interest on your loan for a shorter period of time. Examine your financial circumstances and determine if a shorter loan term is appropriate for you.

Know what you can afford.                 

Be mindful of getting a loan that is too large for your budget. Use our convenient borrowing calculator to see how much you can actually borrow depending on your circumstances. 

Not taking on an excessively large loan can help you prevent future financial difficulties, as well as enable you to simply manage your repayments to ensure that you pay off your debt as soon as possible.

Increase your loan payments or Offset

If you currently have a mortgage, you may work on decreasing your home loan interest using the following methods:

Make additional or lump-sum payments re-draw

Making additional or lump sum payments towards your mortgage’s principle amount will dramatically lower the total interest paid. The extra payment you make helps to lower the interest you pay on your loan. And the extra payment might reduce your debt by years.

There are two methods to make additional or lump-sum payments. The first step is to add payments to your variable loan, which involves sending cash to your loan redraw facility or offset sub-account. This lowers your interest rate while maintaining the same payments amount.

For example, if you have a $400,000 loan and deposit $50,000 in your redraw or offset sub-account, the interest charged on your loan will be calculated using $350,000, which may lower the total interest you pay monthly while increasing the amount you pay towards the principle.

Permanent loan reduction

Alternatively, you may use the additional cash to decrease your loan limit with a permanent principle reduction. In this case, your monthly payback amount would be adjusted using your new limit.

Ask your lender whether you can make additional mortgage payments and which choice is best for you. Typically, persons with variable mortgages may make extra payments. Using our loan repayment calculator, you can see how additional lump sums and repayments may effect your home loan.

Offset Accounts

These work whereby any money in one account, offsets the total balance and so interest in your mortgage. The good thing here is it doesn’t matter who puts the money in the account, it is purely looked as the balance in your offset reduces the balance of your mortgage and so interest. The benefit here is the offset works like a normal bank account, so can use this for your normal spending etc and know any balance is still working for your betterment.

Summary

While seemingly basic options exist it is always worth looking how you can reduce your total loan lifetime. Additionally, many of these can be very flexible using offset or redraw accounts though the tempt to take money back, and negate their benefit needs to also be considered.