Tips for paying off your home loan faster

Here some of the BEST tips to pay off your home loan faster that anyone can apply today and start saving money.

I will let you in on a little secret. It is how you make your repayments that save you the $$$. Have you heard of accelerated payments? Let me explain.

Traditionally when your bank sets your repayments they use a standard formula:-

Weekly repayments = monthly loan repayment x 12 / 52
Fortnightly repayments = monthly loan repayment x 12 / 26

This is because there are 52 weeks and 26 fortnights in a year. Principal and Interest repayments are set by the bank to amortise over a certain period of time (usually 30 years) So if you paid the minimum payments prescribed by your bank; you will pay off your loan in 30 years.

So how do you pay off your loan earlier without paying extra? Simple! You calculate your repayments in a different way. The idea here is to make your repayments either fortnightly or weekly. Look at your repayments this way:-

Weekly repayments = monthly loan repayment / 4

Fortnightly repayments = monthly loan repayment / 2

Here is an example:-

Say your monthly repayments are $2500.00.

Based on this monthly payment; if we use the banks method of calculating your repayments you will pay $576.92 per week and $1,153.85 per fortnight.

If we use the accelerated method your repayments will be $625.00 per week and $1,250.00

If we annualise these repayments out you are paying $30,000.00 per year (ouch that is a lot eh!) no matter which method you use. Now this is where it gets exciting.

Normal weekly repayments compared to accelerated 

Normal fortnightly repayments compared to accelerated

Note that the interest rate of 5.50% is for illustration purposes only and does not reflect an actual rate from any lender on our panel!

As you can see from the graphs above; by simply changing the way the repayments are made; you have the potential to save some serious interest over the term of a loan. If you work out the math; the above examples show a saving of $89,696.00 if you pay fortnightly and $89,649.00 if you pay weekly. Both examples show that you would save around 5 years off the term of the loan as well.

Now naturally interest rates will not stay static over a 30 year period; nor will you stay with the one loan product for 30 years (well at least statistically borrowers don’t stay with the same loan product for 30 years!) Rates will rise and fall which means that your exact savings using this method of calculating repayments is hard to predict, however as you can see from this example; you can save some serious $$$ using this method. Rate movements are largely determined by the Reserve Bank Of Australia (RBA) although Banks/ Lenders can move their variable interest rate independent of the Reserve Bank.

For more information about how you can pay your home loan more quickly click on the link to South West Lending Solutions Free e-book

Sam Zammit is the owner of South West Lending Solutions