How can I reduce my loan?

If you’ve recently had a home loan approved or are already some way into your repayments, you may be thinking about how you can pay it off sooner rather than later. We explore some smart ways to shave interest – and years – off your mortgage.

Note that examples are indicative only, and outcomes assume that interest rates will not change and that all repayments are made on time.

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Increase your regular repayment amount

Paying more than your required repayment amount is another way to reach your home ownership goal sooner.

Example

Trevor decides to contribute an additional $386 per month on top of his $2,315 monthly home loan repayment, paying $2,701 each month. Over the course of 12 months he pays $32,412, which is roughly equivalent to two additional months' worth of payments each year.

This will shave six years off Trevor's 25-year loan term as well as around $80,000 in interest.

• Original home loan repayment: $27,780/yr x 25 years (@ 4.9% p.a.) = $694,500
• Revised home loan repayment: $32,412/yr x 19 years (@ 4.9% p.a.) = $614,948*

* Source: ASIC MoneySmart mortgage calculator.

Make additional lump sum payments

Making additional lump sum payments – especially during the early years of your home loan – can have a profound effect on how much your total home loan repayments will be and the length of time to own your property outright.

Example

Kate’s required monthly repayment amount is $2,485 on a $400,000 loan with a loan term of 25 years. Over the term of the loan she'll pay a total of $29,820 in one year ($2,485 x 12), and over 25 years, Kate will pay $745,500.

Five years into the loan, Kate receives an inheritance of $70,000. Dividing the money, she puts $40,000 into her home loan and $30,000 into her bank account.

Making the lump sum repayment of $40,000 means that instead of paying off her loan after 25 years, she will reduce the loan term by more than three years – assuming her repayments remain the same – and save herself more than $70,000 in interest. The redraw balance will also gradually reduce in line with the loan term.

Find out more about redraw.

Set up a mortgage offset account

A mortgage offset account allows you to offset, or reduce, the interest charged on your home loan by letting you pay down the principal loan amount with your savings.

Say you have a home loan balance of $400,000, and you put $20,000 into an offset account. By doing this, you’ll only need to pay interest on a balance of $380,000 ($400,000 - $20,000) rather than $400,000.

The more money you have in an offset account, up to the balance of the loan, the bigger the savings and the faster your loan can be paid off.

Loans are part of our lives, be it a home loan, car loan or a business loan. Here are some useful tips on what you can do to reduce the costs of your loan!

Reduce your loan costs such as interest payments, annual fees, administrative fees, etc. can help you save money in the long run! Sometimes we are so tied up with our daily lives we miss out on the details which can equate to huge financial savings.

Hear from Marissa and Kristin as they discuss about some easy tips you can make use of, so that you can repay your loans faster, and reduce the total loan repayment at the same time!

Click on the image above or here to watch the full video!

Check your interest rates and review your loans regularly

Usually about every 24 months, you need to check that your loan product is still suitable for your needs. Banks reward new customers, but don’t do much for existing clients. At Rise High we have a team looking after your loans ensuring that you have ongoing savings with your loan. This is all part of our ongoing service for our Rise High clients. No need for reminders, we look after your loans for you.

Make your repayments weekly or fortnightly

An interesting consideration is to switch your repayments to weekly or fortnightly instead of the default monthly payments. By doing so you are putting in payments in line with your income (wages) and that actually decreases your interest payments and pays off your loan faster. Remember interest payments are calculated based on the outstanding loan amount, and on a daily basis.

Pay only for the loan features you need

A variety of loan products have different features, such as credit cards, offset accounts and they all come with set up costs, annual fees, administrative fees and so on. Do you actually need these features? By opting out of loan features you don’t need, you save on fixed costs for your loan. By doing this, you could reduce loan cost drastically!

Keeping the same repayment when variable interest rates drop

If you have a variable interest loan your required interest payments will be lower when interest rates drop. However by committing to the same loan repayment amount, that means you are paying more towards your loan. This will reduce your interest charges and repayment term in the long run. So keep paying the same amount even when interest rates drop!

Set up your loan to be fixed interest, variable interest or a mix of both

Depending on what the fixed and variable interest rate is, and what the banks are offering for your loan (may vary depending on personal circumstances), you need to investigate and understand how does that affect your repayment costs. This is where an experienced mortgage broker will come in to advise you on the various implications of going with a fixed or variable interest loan. Our Rise High brokers spend a lot of time explaining this to our clients. This is because it is important to set up the loan according to your needs and financial situation.

You can also switch from a fixed interest rate loan to a variable rate one, and vice versa, if you discover that it works out better for you in the long run. While there may be some administrative costs from the bank to do so, you should work it out with your mortgage broker to decide if it is a good financial move.

Utilising an offset account

An offset account reduces the interest repayments you will need to make! For example, if you have a mortgage/loan of $400,000 and have a balance of $100,000 in your linked offset account, you will only be paying interest on $300,000 instead of $400,000! This means that if you can put more money and savings towards your offset account, that will help you reduce your loan repayments. You should also direct all your income towards the offset account because interest is calculated daily!

Utilise your credit card if you are good with money management

You can utilise your credit card for your daily spending as they are interest free for a period (30 or 40 days depending on bank). If you pay off the credit card balance fully,  you would have left more money sitting in your offset account. As a result of leaving more money in your offset account for a longer period, interest repayments on your loan would reduce. However it is important that you pay off the card balance fully to not incur any interest charges on your credit card.

Speak to a Rise High Broker

Our service is not just about finding you that one-time loan for your current needs. We work with you to ensure that you are financially set and secure for the future. That is why we regularly review our clients’ loans, communicate with clients periodically to provide updates and also spend time to educate our clients with financial information so your journey to financial stability and freedom can progress! Start to reduce loan costs with us and more today!

Want to find out what we can do for you? Fill in the form below and our multiple award winning team will be in touch! You could also contact us directly here!

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