Ways to reduce your home loan

Mortgage payments can be the bane of any home owner’s existence. Although you will eventually have to pay back the whole of your mortgage, there are a few ways you can make it easier to keep up on your repayments and accelerate paying off your home. 1.

1. Offset accounts

By linking a savings account to your home loan account, any savings you have works to offset the interest you are paying on your home loan.Over time, money in your offset account can help to reduce the loan principal, allowing you to pay off your loan sooner or build up equity.

Let’s say you may have a mortgage of $200,000 at 7.07% and an offset account with $30,000 in it earning 3%. This means that $170,000 of your loan is accruing interest at 7.07% but the rest is accruing interest at just over 4%(7.07% on your loan less the 3% the $30,000 in your offset account is earning). Over a number of years, both the principal and interest on your loan are repaid faster.

2. Honeymoon rates

Many banks are now offering ‘honeymoon rates’ as a marketing tool to lure borrowers into their fold. Basically, the lender will promise a cheaper rate of interest for an initial period (6-12 months) then the rate reverts back to the standard variable rate of that institution.

This system appeals to lenders who plan to attack the loan early by making extra payments in the beginning months to help reduce principal. Honeymoon rates are tempting, but watch out for restrictions or exclusions on other aspects of the loan. Many lenders will limit the available features to offset the lower interest rate. This can result in limited flexibility or penalties over the term of the loan.

3. Debt consolidation

As interest rates rise on your home loan, it’s guaranteed that any credit card or personal loan rates will also climb. This can be crippling as the interest rates on your credit cards and personal loans are much higher than the interest rate on your home loan. Many lenders will allow you to consolidate or refinance all of your debt under the one roof of your home loan.

This means that instead of paying 15 to 20% on your credit card or personal loan, you can transfer these debts to your home loan and pay them off at the current variable rate (about 7.07%).

4. Additional repayments

Whichever way you decide to go with your home loan don't forget to consider the advantages gained through additional repayments.

Say you have a mortgage of $300,000 at 7.25% that requires a minimum repayment of $2,168 per month over 25 years. By contributing an extra $100 per month (that’ s just $25 a week), you will see the loan paid off 2 years, 9 months earlier with an interest payment saving of $46,270.

Whether you make regular payments or irregular one-off payments whenever you have some spare money, the financial benefits can be considerable – and you’ll be debt free much sooner.

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