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Now that you have your loan sorted and you’ve moved into your new home, the balance on your home loan can make you feel like you’ll never pay it off.  But remember, every little bit counts. Here are seven ways you can pay off your home loan faster. Most of these options work on the principle of reducing the outstanding balance of your loan on which interest is calculated each day.

This means putting as much as you can into your loan. Keep enough to redraw some if needed to and keep your Emergency Stash somewhere else!

1. Sync up your repayments with your pay day

Syncing your home loan repayments with your pay day, means your money is working for you every day from the day you receive it. (Not sitting in another bank account for a week or more waiting for the next mortgage payment date.)

Sherpa Says: Match your payments with the frequency you get paid. If you get paid fortnightly; pay fortnightly. If you get paid monthly; pay monthly.

Some lenders allow you to choose the day your home loan payment is deducted. Make sure they don’t just extend the first payment period. Say you get paid on the 15th of each month and you settled on the purchase of your home on the 10th of May.  Ordinarily, the first payment would be due on June 10th. This means that the money for each payment will have been in your transaction account for almost 4 weeks from when you got paid. Talk to your bank to arrange for payments to be made on the 16th of each month.  But make sure the first payment is made on the 16th of May (part payment) and normal payments are then made every month on the 16th.

2. Make Fortnightly repayments

If you get paid fortnightly, try to pay half the normal monthly payment fortnightly. In effect you make an extra monthly payment each year. This is because there are 26 fortnights but only 12 months. If you get paid weekly, pay a quarter of the monthly payment weekly.

Don’t let the bank recalculate the repayment to a weekly or fortnightly payment. Ask them for the monthly payment and divide it  by 2 or 4 as the case may be.

The normal monthly payment on a $500,000 loan at 5.00% is $2 684.  By paying $1 234 fortnightly or $671 weekly you could save 4 years and 9 months and more than $85 000 in interest over the life of the loan. If you get paid monthly, you could achieve the same result by increasing the monthly payment to $2 908.

3. Mortgage offset account

A mortgage offset account can save you interest on your loan by reducing the balance on which your interest is calculated. This means your mortgage account is linked to a transaction account into which your salary and other cash can be deposited and from which you withdraw money to pay expenses, bills and credit cards as these become due. For the time your money sits in this account, it is ‘offset’ against your loan and so reduces your interest bill.

4. Make lump sum repayments

Use a portion of your tax refund or other unexpected windfalls such as bonuses or an inheritance or lottery win to make additional payments.

5. Increase your monthly payments

Set up an extra scheduled repayment to increase your total monthly payments. Don’t adjust the banks standard payment which will usually be processed by direct debit, but rather set up a separate transfer so that you remain in control. If you are following the LifeSherpa 50/30/20 budget rule, these extra payments come from your savings bucket, not an additional living or fixed expense.

6. If interest rates drop, don’t drop your repayments

If you have a variable home loan and the interest rate drops, continue to pay the loan at the higher rate.

7. Review your loan regularly
Review your loan every now and then to make sure it’s still a best-fit for you. Banks constantly offer deals to entice new borrowers that they don’t offer to existing borrowers. Protecting their so-called Backbook is critical to the bank’s profitability. So if you talk about refinancing they will sometimes offer you the same deal to keep you on their books. Make sure you get a fair deal. It is important to review your loan if your circumstances change. As your property rises in value, your income rises and your loan balance decreases you may qualify for a better deal.

Vince Scully | LifeSherpa

With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Before creating LifeSherpa, Vince founded the Calliva Group; a fund manager, product issuer, adviser and lender. Vince is an adviser to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie Bank’s infrastructure team.

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