12 tips that really work to pay off a loan faster

12 tips to pay off a loan faster

There is a lot of advertising around that makes claims about paying off home loans faster. The principal ways to reduce the cost of your home loan (and mortgage time frame) are:

1. Get a cheaper interest rate and pay only for the features you need
2. Make your payments more often
3. Make payments greater than the required amount - as much as you possibly can

Paying off your loan faster really is as simple as the price of your funds and your own diligence. You will only achieve substantial savings by employing one or any combination of the methods above. It's how you go about achieving these objectives and maintaining your advantage that counts.

Get A cheaper interest rate with a flexible structure

The biggest single opportunity to reduce your mortgage is finding the cheapest interest rate you possibly can. If you are planning to make extra repayments, make sure your loan has the cheapest rate, with the flexibility to make extra payments that works with your lifestyle. Home loans with these kinds of features might come at a slightly higher price, so you need to balance how much you need the flexibility with the overall cost of the loan. Only get the features you need as they do cost money.

Ability to pay extra funds (ad hoc or consistently)

Make sure your loan gives you the ability to pay extra (regular or ad-hoc). Making additional payments on your loan, big or small, is a real benefit. If your interest is calculated daily, extra funds have the immediate effect of reducing the loan balance and, therefore, the interest payable. Your salary is an excellent example of a regular payment that should go directly into your home loan, even though you draw against it. With the right product (redraw with 100% offset), for the time the extra funds from your salary sit in your loan account, it is effectively earning interest at your home loan rate-which in many cases is pretty much double the savings interest rate, but isn't taxed. If the right loan is set up from the outset, making extra payments should be very easy via direct debit/credit, ATMs or internet and phone banking. If you would like to check out how much difference paying slightly extra can make, check our extra repayments calculator or if you would like to look at ad hoc payments, go to our lump sum repayment calculator. 

"After years of indifferent service from our bank, we decided to change with the assistance of John Brennan from X Inc.  We got independent advice without the usual 'sales hype'. He got a better deal and the process was dead easy." Amanda Machin, General Manager

Make extra repayments in the beginning

If you are in a position to choose when you make extra payments, make sure you pay extra in the beginning, as that is when you can achieve the greatest impact on your loan. The problem with any home loan is that, in the early stages, you are mostly paying interest and not reducing the principal much at all. Every dollar you can put against your loan early means a faster reduction of your principal and as a result, less interest payments down the track.

Make your first mortgage repayment on settlement date

Here is an excellent example of early payment that everyone should plan to achieve no matter what! This one simple action will cut  one year and one month and save you $27,629.35 off your $300,000 home loan (with the professional pack at 8.27% on a 30 year loan)!

13 Repayments a year

A reasonably painless way to reduce your home loan is to ensure you pay it more frequently than monthly. Many loan products allow you to pay weekly, fortnightly or monthly. You get interest savings by paying more frequently, where interest is calculated daily, because you are reducing the loan balance on a more regular basis. If you have a tiny bit of extra money, you can gain an additional advantage by making your fortnightly repayment half the month (or weekly, one quarter). This achieves the equivalent of 13 monthly repayments each year and will save you $165,062.78 interest and 7 years 8 months off your loan term (on a standard pro pack).

What if you stopped smoking, eating muffins and drinking coffee?

Most people who earn more than $70,000 a year, without too much effort, would save about $500 a month by trimming little luxuries and applying that amount monthly to their loan. (At $20 per day, a muffin, a coffee and a packet of smokes really does add up to $500 per month!)  On a $300,000 home loan with a professional pack at 8.67%, you would roughly shave more than $275,912.20 in interest and 13 years and 9 months off a 30-year loan!  Even if you can only manage to achieve luxury skimping for the first few years, it will make a huge difference. Most people tend to earn more as the years go by, and career earnings often have a way of catching up with your temporarily side-stepped luxuries anyway!

save $137,00 on a $300,000 home loan

Go to the section on saving $137,000 and find out how by negotiating a discounted rate and making repayments at the original rate, you can save $137,798.61 and six years four months off a 30 year home loan without too much effort.

"Peter Behrendt walked us through the entire application process step-by-step and by restructuring our existing loans, we were able to purchase an investment property with no additional monthly outgoings. We were very pleased with the result. " Cameron and Heidi, Fremantle WA

Home Loan Portability

If you are like people, you won't live in the same house for the entire 25 or 30 years of your loan. With many home loans, you can now sell one home and buy another without having to reset your loan, thereby avoiding all the normal set-up and exit fees.

Match your fixed rate

If it makes sense, make sure you match the fixed-rate period of your mortgage to the time that you may keep a property, e.g. do not take a fixed rate for ten years if you may sell the property in three years.

The big four banks aren't the only lenders with good products

Big advertising budgets and size do not mean that a lender has the best products. If your mortgage broker suggests a lender you haven't heard much about, it doesn't mean they aren't reliable. Ultimately, it is your choice which you go with, but don't be afraid of smaller lenders and international banks.

A note on fees and rates

Remember to check a home loan's comparison rate (which takes key fees into account) and be careful of "honeymoon", "introductory: and "low start" loans, as the savings tend to be short-lived and they might not allow additional payments. If you already have a mortgage and want to change loans, you need to refinance and that will probably cost you money (see Refinance - What are the Costs?).

Scenarios to really save

Each scenario in this section is calculated as a stand alone. Imagine what you could achieve if you put two or three in place at the same time!

Don't be a Klux about your Home Loan. Stay informed.

Even if you don't want to do this yourself, make sure your mortgage broker keeps you up to date with changes in the home loan market. Keep your mortgage broker up to date with changes in your personal finance situation too. You never know what opportunity might present itself with new products and changes in your circumstances. If you are informed, you can act.