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If you’re sitting on a 30-year loan, being mortgage-free can seem like a long way off. But small changes to how you live and structure your home loan could have an impact on the size of your loan and how long it could take you to pay it off.
The interest you pay each month is calculated based on how much you owe – your principal home loan balance. As your principal goes down, you pay less interest, and more of your repayments go towards reducing your principal. Here are eight ways that could make that happen sooner.
1. Review your situation
Many people set up their home loan and then don’t review it for years. But factors affecting your position can change – check to see that your loan is structured to best suit your current circumstances. Your situation can change quickly, and it’s important to review your position regularly to see if you could be paying off your loan faster by increasing your repayments or making a lump sum payment, for example.
2. Consider splitting your home loan
If you think you’ll make extra or lump sum payments during your loan term, you could consider putting some of your loan on a floating rate. That way, you can make extra payments without incurring early repayment charges. A floating home loan could also be in the form of a revolving credit facility, which acts a bit like a big overdraft. If you put all your earnings into your revolving credit and limit your spending, you may be able to reduce what you need to pay on interest each month.
Floating and revolving home loans tend to have higher interest rates so it’s important to consider how much and when you’re likely to add those extra payments.
3. Think shorter-term
4. Swap to weekly or fortnightly payments
Say you change to paying $1500 fortnightly instead of $3000 monthly. That means you’re knocking $1500 off your home loan two weeks earlier— and with that reduced loan principal, you’ll save on interest. It’s the small amounts saved here and there that add up over a loan’s lifetime.
And paying weekly or fortnightly can also create additional payments over the course of a year so you’ll end up paying a bit extra and may not even notice. For example, over a year you could make:
- 12x monthly payments of $3000, which would be $36,000 paid to your loan.
- or 26x fortnightly payments of $1500, which would be $39,000 paid to your loan.
5. Keep repayments the same
6. Pay fees upfront
7. Cut back on the nice-to-haves to increase repayments
8. Pay a lump sum
What next?
Even if you’ve already taken out a loan for 30 years, with careful planning, you can pay it off faster and pay less interest, reducing the overall cost of your loan. If you want to talk about an existing home loan or you’re looking to get onto the property ladder, give The Co-operative Bank a call or visit your local branch – our home loan specialists are always here to help.
THE COOPERATIVE BANK DISCLAIMER: The views expressed in this article are for general information purposes only, do not take into account your individual circumstances and are not financial advice.
Jon Armour
Jon is Chief Product Officer at The Co-operative Bank – which is committed to helping New Zealanders bank better. Jon’s role is to ensure The Co-operative Bank’s customers have the best banking products available.
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