Home Loan Repayment Strategies
Acquiring a home is a significant milestone and for most Australians, the best way to finance this purchase is through a home loan. Once you’ve secured a home loan, the work of paying it off begins.
Mortgage can easily overwhelm you if you don’t have a clear repayment plan; every tactic that could work should be explored! It’s better to fully understand how to stay on track and minimize financial stress, especially regarding your regular mortgage repayments.
This guide provides essential knowledge and tips on making your home loan repayments more efficient and worthwhile.
What’s your home loan repayment priority?
Not every borrower is the same; some want to pay off their loans faster and gain full ownership of the home, while others prioritize having a more practical repayment amount that won’t hurt the budget too much.
The good news is that both these goals are possible as long as you weigh your options carefully.
You can always use our handy home loan repayment calculator (link) to estimate what’s a realistic mortgage repayment amount based on your current budget.
Understand your loan structure
Before diving into repayment strategies, you have first to determine the structure of your home loan. The two most common types are:
- Principal and Interest – this loan structure means your repayments will cover both the principal amount borrowed and the interest the lender charges. Over the years of paying off the loan, your entire loan balance decreases.
- Interest Only – An interest-only loan allows you to pay the interest for a specified period, usually 1 to 5 years. After the period, you then transition to principal and interest repayments.
Because of recent interest rate hikes by the RBA, monthly repayments are hugely impacted for hundreds of thousands of Aussies. It’s a serious issue that could potentially land many in a “mortgage prison” because of continuously increasing home loan repayment costs.
In today’s climate, you may be encouraged to opt for interest-only structure as it keeps your repayments lower than if you were to shoulder principal and interest. However, be mindful about the consequences of paying only the interest. You won’t be chipping through the principal loan amount even with years of repayments.
Make sure you revert to a principal and interest arrangement when you’re no longer financially burdened so that you could complete your home loan payments sooner.
If possible, pay more often
Who knew that making mortgage repayments more frequent would help you making extra strides towards your goals? Yes, for many, switching to fortnightly or weekly repayments can result in an extra month’s repayment per year.
Given that the first 5 to 8 years of a 25-year mortgage repayment will go to paying off the interest, anything extra means cutting down on the amount of interest to be paid in the long run.
And because there are 26 fortnights, you’re actually making the equivalent of 13 monthly repayments if you opt for this payment schedule. You end up shortening the loan term and reducing interest paid – without feeling a huge difference in paying off the mortgage.
Make extra repayments a habit
Not all home loans allow making extra repayments, but if allowed, paying more than the minimum repayment amount can help reduce your loan balance faster and save on interest charges.
The big ask here is to find the source of these extra repayments. Since wages growth hasn’t picked up materially to match the inflation rate, every bit of extra fund source counts.
For instance, windfalls like a year-end bonus and other large earnings could directly slash off mortgage costs. The little things matter, too. Shopping less frequently, making meals at home instead of eating out, etc. and then putting your savings towards the repayment could easily make a huge impact without thinking about it.
Check if your lender allows additional repayments without penalties.
Negotiate with your current lender
It’s going to involve more steps if you’ll switch lenders. As much as possible, discuss first with your current lender about lowering your interest rate or changing your loan terms. They may be willing to negotiate to retain your business.
If, after a couple of years you feel dissatisfied with the current lender in terms of customer service, responsiveness, and if other lenders have additional features you are looking for, then maybe it’s time to consider switching to another bank.
Consider some changes in your home loan
Another option to lowering your interest rate is to make important alterations to the loan type. Since many Australian borrowers who locked in at fixed rate loan a few years ago with record low rates are now subject to much higher variable rates, there’s a significant need to revisit their mortgage structure to address the higher costs.
Here are three ways to do so:
- Split rate home loan
A split rate home loan enables you to combine both fixed and variable loans. Borrowers can ‘split’ the loan into separate accounts, with some loan term subject to a fixed interest rate and some on a variable rate. You could do a 50/50 split or put the majority into one loan type you prefer. With a split rate home loan you can take advantage of having certainty during the fixed rate years, and the flexibility during the variable rate loan term. Do keep in mind that fixed rate break costs as well as additional account-keeping fees may apply.
- Offset account
Consider opening an offset account linked to your mortgage. An offset is a transaction account that offsets the balance against your loan with the deposit placed into the account. The bigger the deposit, the more you will reduce the interest charged on your repayments. Any money deposited into the offset account reduces your loan balance. The key here is to keep a substantial amount of deposit in the offset account so that your monthly mortgage repayments will be lower in rate.
- Refinancing
Most Aussies pay off their mortgage in 25-30 years. This is an ample time to switch to multiple lenders or refinance their loan structure, which can potentially make home loan payments easier. For one, you could access better loan terms if you negotiate with the existing lender or if you switch to a new bank with a better rate. Aside from lower interest rate and improved loan terms, refinancing also lets you access equity you’ve built in the property. But refinancing involves a lot of weighing pros and cons, so before refinancing, make sure it’s worth the time and effort – and that it will be the financially sound decision for you.
Think twice about bridging loans
Sometimes, you may decide to move to another home whilst mortgage is still being paid on your current property. Bridging loans are a short-term financing option that can be used when transitioning between selling your current home and purchasing a new one.
Even though bridging finance is useful when covering the period between buying the new property and settling your for-sale house, bridging loans could increase the overall loan amount you’re paying off.
These often have higher interest rates and fees compared to regular home loans. Moreover, the costs associated with the bridging loan can add up, potentially increasing your entire mortgage expenses. Bridging loans can also be riskier if the property market experiences a downturn or if you are unable to sell your current home at a desirable price. You may end up with a higher debt burden than anticipated.
If you are set on selling your home, instead of getting a bridging finance, sell the property first before purchasing a new one. And if you have built equity, you could use that to cover the downpayment or deposit for the new home.
Loan Repayment Issues? Talk to Us
At Intellichoice, we’re here to keep you informed. If you feel overwhelmed or unsure about managing your home loan repayments, our mortgage specialists are a call away to provide personalized advice. Let’s talk about your home ownership journey – if you want to refinance, look for lower interest rates, or start on an aggressive savings plan – we’re here! Get in touch today to get started.
