With terms of 30 years or more, a home loan might be the longest financial commitment you ever make. All the more reason to set good habits in place at the beginning to pay it off faster.
Here are 5 simple strategies to help you pay your loan down more quickly – so you can own your own home sooner.
Whether you’re buying or refinancing, you’ll notice there are many different kinds of interest rates. Choosing the one that suits your goal could help you pay your loan down much faster.
First of all, it helps to know there are different rates for investors and owner-occupiers. Investor home loan rates are typically a little bit higher. If you intend to live in the home, make sure you include that in your application or tell your lender – it may give you a lower rate, which could reduce the interest you’re charged and help you get to the end of your loan quicker.
There are also fixed interest rates – that remain unchanged for a set period – and variable rates, which your lender can change in response to the market. Fixed interest rate loans give you a way to lock in a rate for a period of time, while variable rates can change at short notice. You can choose one or split your loan into 2 and use both.
You could view a split loan as a way to manage the risk of rates changing. Before you apply, take a look at what rates lenders are offering and which direction the cash rate has been going. Based on what you see, you can choose fixed, variable or both.
With home loans, there are two different types of repayments – principal-and-interest repayments and interest-only repayments.
Principal-and-interest repayment loans have repayments that count towards 2 things – the amount you initially borrowed (known as the principal) and the interest the bank charges you on the loan. Each repayment reduces the principal – the loan amount that you pay interest on – which means you pay less and less interest with every repayment. Of course, this is really helpful if you want to pay your loan off faster.
With interest-only home loans, you only need to pay the interest charged on what you borrowed. This type of loan can be popular with investors – because repayments are lower and interest paid on a rental property could be claimed as a tax deduction – but it’s not the best option if you want to pay your loan down as quickly as possible as you are not contributing to the principal amount.
So you’ve chosen your loan, interest and repayment type – now it’s time to focus on paying your mortgage balance down.
Want to try and repay your loan in 10, 7 or even 5 years? The most effective way to do this is to make more frequent payments over and above the regular repayments you have to make on the loan. It might help to view your mortgage as a kind of enforced savings account – just put any cash that you can spare into your loan or offset account and then keep it up as you work towards your goal.
Something to remember with fixed rates: with our home loans, you can only make an extra $30,0001 in repayments during the fixed period (this may vary between banks). After that, you may need to pay break costs and other fees. If your loan is variable, there are no limits on your extra repayments – so set your own pace. If you’ve split your loan, remember that you can make extra repayments on both fixed and variable parts – once you hit the limit on your fixed loan, focus on paying down the variable one instead.
You can also choose weekly, fortnightly or monthly repayments when you set your loan up. Choose fortnightly, if you can – as there are 26 fortnights in a year, it means you’ll make the equivalent of one extra repayment each year, which could shave months off your loan in the long run.
We used the word ‘offset’ above without explaining it.
Sorry – we hate jargon, too.
If you don’t already know what it means, stay with us for a moment – it could help you save a lot of interest on your home loan.
An offset is a transaction account that’s connected to your variable rate home loan account. If you keep money in your offset, you only pay home loan interest on your remaining loan balance minus your offset balance.
For example, if you have a home loan of $800,000 and put $100,000 in your offset account, you only pay interest on $700,000 of your home loan. The more you put in your offset, the less interest you pay. This could save you heaps over time, especially if you’re also making extra repayments. What’s more, you can withdraw money from your offset whenever you like and use it like a regular transaction account.
One of the most basic ways to pay your loan off faster is to set a shorter loan term.
When you set your loan up, you can choose how long it will last (aka the ‘term’). Your term affects how big your repayments need to be. A loan with a term of 30 years will have lower regular repayments than one with a term of 25 years or 20 years. The big difference is that a longer term means you will pay more interest over the course of the loan.
Let’s say for example you take out a home loan for $800,000 at 5.5% p.a. with principal and interest repayments. For a 30-year loan term, your fortnightly repayments would work out to be $2,271, the total interest payable would be $835,212, and your combined repayments would total $1,635,232.
For a 25-year loan term your fortnightly repayments would sit at $2,457, the total payable interest would be $673,810, and the total you'd have to repay over the life of the loan would be $1,473,810.
By paying your loan off five years sooner you would save $161,422. And you would only need to top up your repayments with an extra $186 a fortnight.
This means choosing a lower loan term doesn’t just mean you will repay your loan faster. It also means you will pay less interest. Kind of a no-brainer, right?
The challenge is to find a balance between the length of your loan and what repayment amount will suit your budget. Have a play with the loan term field in our repayment calculator to see how a loan with a lower term could fit with your budgeting and help you save in the long run.
Credit criteria, fees, charges, terms and conditions apply. Based on St.George credit criteria, residential lending is not available for Non-Australian Resident borrowers.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.
The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.
1. If you make a prepayment beyond the prepayment threshold or change to another repayment type then break costs and fees may apply. Customers can make prepayments of up to the $30,000 prepayment threshold for the entire fixed period without break costs or fees applying. For fixed rate loans taken up prior to 18 August 2019, customers can make prepayments of up to the $10,000 prepayment threshold in each 12 month period without break cost or fees applying. Prepayment break costs are explained in the Things You Should Know About Break Costs.