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How you could pay off your home loan early

By Emma Smith

You may have signed up for a 30-year home loan. But that doesn’t mean your home loan needs to run the full distance. We show you how you may be able to pay off your home loan quicker and become mortgage-free sooner than you might have thought.

A home loan may seem like a long financial commitment, especially if you’ve signed up to a 30-year term. But there are ways you could reduce the term of your mortgage, sometimes significantly. Here we show you five simple strategies that could help you work towards reducing the term of your loan and help you to try and pay it off a little earlier.

1. Set up a redraw account or mortgage offset facility

A redraw account and mortgage offset facility both work similarly, insofar as any funds you contribute to them get offset against the interest you’re paying on your home loan.

In other words, if you have a home loan of $500,000 and $100,000 in your redraw account or offset facility, you’ll only pay interest on $400,000. Because your home loan repayments don’t change that means you’ll be making a bigger dent in your home loan principal than you otherwise would.

One of the main differences between a mortgage offset account and a redraw facility is that an offset account is generally a standard bank account which lets you access your funds at any time. In a redraw facility, your funds are usually more difficult to get hold of.

Both offset facilities and redraw accounts are usually only available with a variable home loan. That could make a variable or split home loan a better option than a fixed rate home loan if you want to try and pay it off fast.

2. Pay your salary into your offset account

If you do choose to set up an offset account, using it to full advantage means always having as much money as possible in it. The amount you’re offsetting against the interest on you home loan is calculated daily. So you could choose to have your salary paid directly into it to maximise the available funds.

To maximise this approach, you could also investigate the benefits of putting all of your living expenses on a credit card. To make this work you need to ensure you budget carefully and pay the credit card off in full each month before the due date. That way, you get to keep your money in the offset account for as long as possible while taking advantage of your card’s interest-free period.

If you choose this mortgage-busting technique, you really need to be disciplined.

3. Up your repayments

If you have a redraw facility on your home loan, you could choose to pay more each month than you are obliged to.

That may sound difficult but it doesn’t have to be. One of the easiest times to contribute extra is if you find yourself earning more or spending less. For instance, if you receive a pay rise, you could choose to contribute some or all of the extra money towards your mortgage. Alternatively, if interest rates fall, you could consider making the same contribution you’re used to paying. It could really make a difference to the term of your loan without any change to your current lifestyle at all.

For example, if you were paying $5,000 a month and a change in interest rates meant your repayments would fall to $4,700, you could continue paying the same as you were. Then you’d contribute an extra $300 a month or $3,600 over a year.

The above information is for general use only and does not consider your individual circumstances. Ray White Drysdale strongly recommend you contact your mortgage broker, financial adviser or accountant for individual advice.

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