There are some simple things you can do to save thousands on your home loan, all it takes is a little know-how.
The number one thing to understand is home loan calculations. The interest on your home loan is calculated on the daily balance and applied monthly in arrears. Knowing this means you can really take advantage and bring your daily balance down.
Even if you only decrease the daily balance by $1, that’s a reasonable saving on both your term and interest payments in the long run.
CALCULATING HOME LOAN REPAYMENTS
It is important to consider this as a big picture project, home loans are a long term expense and commitment. I can promise that those savings will count where it matters. When you started investigating your home loan options, you probably hear your potential lenders quoting per month.
For example, a $500,000 mortgage at 6% over 25 years would result in a minimum repayment of $3222 a month.
They might quote monthly, because that is the easiest way to break down the repayments, but that is not a boundary you have to stick to. You are only required to meet the minimum repayment by your due date, how you do that is completely up to you.
The easiest way to save money on your home loan is to make early repayments, obviously making extra repayments will also move things along faster and decrease your interest overall, however, to save money without tightening your belt, simply pay before you are expected to.
To simplify and streamline this process you can synchronize your repayment date to your payday. You can choose if you make that weekly, fortnightly or monthly, all three options create a similar amount of savings, although fortnightly gives you some stability and a calculated result simply due to the calendar difference.
WEEKLY AND FORTNIGHTLY HOME LOAN REPAYMENT BENEFITS
There are 26 fortnights in a year, which will give you 13 repayments a year rather than 12.
If you were to take your minimum monthly repayment amount, divide by two and pay that amount every fortnight you will earn a substantial amount back off both your term and interest repayments.
If you prefer to make your repayments weekly you can simply divide your monthly repayment amount by four. In this case, the savings are slightly greater on your interest but not a great advantage on the term.
One word of warning, if you request a fortnightly repayment schedule at the time of your loan, some lenders will calculate the repayment amount by taking the monthly repayments figure, multiplying it by 12 and then dividing it by 26 to give you a fortnightly figure.
While this is correct, it will not reduce your home loan as fast as paying fortnightly on a monthly calculation.
It certainly looks good on paper, because it’s a shorter time commitment, however, the real benefits of a fortnightly schedule are that you are ahead of your interest expectations.
MONTHLY HOME LOAN REPAYMENT STRATEGY
If you get paid monthly you have two options available to you to save money on your home loan.
The first option is if the loan is new. In this case, you can make your first repayment the moment the loan account is given to you. That way you will pay monthly in advance and you won’t even notice the difference.
Otherwise, if your loan is already in progress and you can’t afford to make an additional payment to bring your pay sequence forward to the start of your loan month, ask your lender about the possibility of an offset account.
You might also want to consider a redraw, however, this would depend on the conditions that might be attached to it.
To save money, move your entire salary into your offset or redraw account on payday. To cover for living expenses during the month use an interest-free credit card. Once your credit card bill arrives, pay it off using your offset or redraw facility.
Just be aware that this method only works if you stick to your budget for spending and you make the credit card payment before the interest-free period ends.
Every loan is different so please check with your lender before making any changes to your payment cycle to be sure that the move will be beneficial to your situation. You may find that your fixed rate home loan may not be flexible enough to handle fast repayments.
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