Finding the right home loan and the best way to pay it off can seem insurmountable alone. But with the help of an experienced broker, it’s much easier finding terms that will suit you. Read on for our guide on why and how to repay your home loan quickly.
What are the most common home loans in Australia?
Principal and interest, and interest only. Principal and interest loans spread the amount borrowed plus interest over roughly 25 to 30 years. Interest only loans cover the interest alone, so the balance moves only when you pay extra. Within both, the rate can be variable, fixed or split.
It’s easy to see why it can be intimidating picking the home loan that suits your situation when there’s so much choice! To help, here’s a rundown of the most common home loans:
What is a principal and interest loan?
The standard home loan. You make regular repayments that cover both the amount you borrowed and the interest charged on it, usually over 25 to 30 years. Because every repayment reduces the balance, the interest charged falls over time, provided you keep to the schedule.
These are often standard, with borrowers making regular payments against the amount loaned, including interest charges, over a 25-30-year period.
What is an interest only loan?
A loan where your repayments cover the interest and nothing else. The amount you borrowed stays where it is unless you make extra payments on top. Repayments are lower while the interest only period runs, but you have not reduced the debt, so the cost arrives later.
These require payments to cover the interest of the loan only. The actual amount you borrow will only reduce with extra payments.
Within both these loan products, there can be a variety of different interest rates, including:
- Variable interest – the rate can go up or down in line with cash value or lender terms.
- Fixed interest – interest will remain unchanged over a fixed time (usually 2-5 years).
- Split loan – this is a combination where part of your rate is variable, and part is fixed.
Why pay your home loan off faster?
Because interest is charged on what you still owe. The larger the balance and the longer it runs, the more interest you pay over the life of the loan. Falling behind the schedule compounds the problem. Paying down faster shortens the term and cuts the total interest.
Once you have secured the right home loan and purchased your dream property, it can be tempting to rest on your laurels and worry about repaying your debt later. The Australian Investments and Securities Commission shows this is a common mistake – repaying your loan as quickly as possible will often save you money in the long run.
The larger your loan, the more interest you’ll pay on the principal debt, and if you ignore or fail to keep up with your payment schedule, you’ll start to struggle.
How do you repay a home loan quicker?
Three levers. Find a cheaper interest rate. Make larger or more regular repayments, which shortens the term. And plan the repayments before you commit, rather than hoping. Extra payments can attract a transaction fee, so check that first, and expect the saving to depend on your balance and rate.
- Find a cheaper interest rate – shop around to find an interest rate on a home loan that seems within your means to pay off as soon as possible.
- Make larger or more regular repayments – this reduces the length of your debt. Be sure to check if any extra payments incur a transaction free.
- Plan for speed – the key to good financial health is planning. If you don’t think you can afford the repayments, you should speak to a financial specialist who can offer guidance on the next steps.
For more information on loan repayments or finding the right home loan, contact our team today!