With wages plateauing, it can be hard to find the extra cash to pay off your home loan faster!
With interest rates at record low levels, it is important to explore ways to pay off your home loan faster.
Why it is important to pay off your Home Loan faster
One major reason for paying a Home Loan off faster is economic – you will save a lot of money!
Paying off your Home Loan faster will also:
- Provide a buffer against future rate rises which may make it harder due to low wages growth
- Cushion against unexpected contingencies – unemployment, illness, changes in family circumstances
- Free up capital and equity for wealth creation
Pay your Home Loan off faster with a Mortgage Offset Account
One of the easiest ways to pay your home loan off faster, to is to use a Mortgage Offset Account.
What this means is credit balances in your Offset Account(s) are notionally deducted from the balance on your Home Loan.
The result being you pay less interest on your Home Loan!
Note – Mortgage Offset generally only applies to variable rate loans, not fixed rate. That said, some Banks may provide offset capability against one year Fixed Rate Loans.
The above example uses a structure of a main offset account and sub accounts offered by some Banks. In this example, the total credit funds in the offset “pool” is $23,000.
If the couple had a loan of say $500,000, then after the offset they would pay interest on only $477,000.
As a percentage of Home Loan balance, the offset may not seem great, over time the savings can be substantial!
A Mortgage Offset Account makes financial sense!
Using an Offset Account will provide a better return than say placing the monies in a savings account or term deposit. The reason being, the Home Loan interest rate, will always be higher than what Banks pay for monies held on deposit.
The savings you enjoy using an Offset Account are also tax free, whereas interest earned is taxable income!
How to increase the Mortgage Offset!
Obviously just after you buy a home, you may not have a lot in the way of credit funds to use as an offset.
However, with some planning there are steps you can take to pay off your Home Loan faster:
- Have your salary credited direct to your Mortgage Offset Account
- Pay all your expenses via Credit Card during the month – then clear it before the interest free period expires
- Where possible, arrange for regular payments to be made at the end of the month
Providing you are disciplined, you will build up funds during the month to offset against your Home Loan. Whilst much of this may be cleared when you pay your bills at the end of the period, in the meantime, you will have saved on interest!
Check with your Bank what Mortgage Offset arrangements they offer
The offset arrangements available differ from Bank to Bank. So, talk to your Bank.
It is important the account offers 100% offset and it should be fee free. (Transaction limits may apply)
Some Banks allow multiple accounts or even sub accounts to be offset. However, this seems to be limited to the smaller Banks, apart from the Commonwealth.
Importantly, because the account is offset, it doesn’t mean you can’t have access to it when needed. You operate your accounts as normal.
Pay off your Home Loan faster by making extra payments!
Another way you can save on interest and pay off your Home Loan faster is to make extra payments . (You can only do this for variable rate not fixed rate loans)
An extra $50 per week can deliver significant interest rate savings over the term of the loan!
For example, on a loan of $500,000 at 3.80%, paying an extra $50 per week, shortens the loan term from 30 years to 22 years and 6 months – delivering a saving of $94,189!!!
Summary
For most people, a Home Loan will be one of the largest financial commitments they undertake – the faster you can repay the borrowing the more interest you will save.
Using a Mortgage Offset Account is a simple and practical way you can save money and pay off your Home Loan faster.
If you are financially disciplined, by using your Credit Card for living expenses and bills during the month and then paying it off before the interest free period expires, you can amplify the savings.
If you would like to learn more about how you could pay off your Home Loan faster don’t hesitate to give me a call.
