There are many different strategies to repaying your loan back quicker than the approved term, but none of them include a “magic fairy” that miraculously repays large amounts off your loan!
The cold hard facts are that to repay your loan back quickly requires you to in some way or form utilise more of your disposable income to the benefit of your loan.
Six of these strategies are:
1. Make additional repayments
This strategy is simply a matter of running a household budget and working out how you can save money in areas of your life to redirect those funds to increase your loan repayments.
Increasing your repayments by $200 per month on a $300,000 loan at 5.00% p.a. over a 30 year term could save you $69,210 in interest and result in the loan being repaid 6.4 years earlier
This requires finding additional funds of approximately $50 per week. Do you think with some small changes in lifestyle choices and daily living expenses you could find an extra $50 per week? Even an additional $20 per week (say 5 coffees!) could have a big impact.
2. Make your loan repayments fortnightly rather than monthly
The strategy of making fortnightly rather than monthly repayments is a simple arithmetic calculation. There are actually 26 fortnights in a year, so halving your monthly repayment and repaying fortnightly will actually see you making the equivalent of 13 monthly repayments per year.
You hardly even notice the additional repayments in your back pocket as it is only a small change each fortnight.
So if you are currently making monthly repayments this simple change to how you make repayments could save you $51,014 in interest and shave 4.7 years off the term of a $300,000 loan at 5% p.a. established over 30 years.
If you are already paying fortnightly, check with your credit adviser or lender if you are paying a “true” fortnightly repayment or half of a monthly repayment.
3. Utilise a Loan Set Off account
A loan set off account is a type of savings / transaction account where rather than pay you interest on your savings, the bank offsets the balance of your savings against your outstanding loan balance, reducing the loan interest payable.
Offset accounts therefore enable you to utilise savings to reduce the interest payable on your home loans and assists with repaying your loan quicker as your loan repayments don’t change, just more of each payment is utilised to reduce the principal.
This type of account is perfect for people with a home loan who are looking to also save funds for a rainy day. Check with you credit adviser or lender if you can have access to a loan set off account.
4. Consider if a Line of Credit will work for you
Some lenders offer home loans in full, or in part, as a Line of Credit which can also be utilised as your day to day transaction account. Under this strategy you deposit all of your income into the line of credit, which reduces your balance outstanding and therefore interest paid, and only withdraw the money as needed for daily living expenses.
Utilising an account like this takes discipline as ultimately you want to be reducing your loan balance and not utilising this account as easy access to funds for impulse purchases.
I personally believe that if you take out a line of credit, choose one that the limit reduces on monthly so that you know your debt is regularly reducing.
Utilised right, this strategy can be very effective in reducing loan balances.
5. Utilise the interest free days on your credit card
Credit cards and the access to easy money are not for everybody. However if you believe you can be disciplined and only utilise the card to your advantage then this strategy may work for you.
The theory with this strategy is that you put all of your income into a Loan Set Off Account or Line of Credit to reduce your daily interest while using your credit card for all daily expenses. You then repay your credit card in full each month on the due date so that you don’t pay any interest on the credit card.
The end result being you use your regular income to reduce your loan interest, and delay paying your expenses by utilising the interest free days of your credit card. An effective strategy if done right!
6. Use RBA rate cuts to your advantage
This approach uses reductions in interest rates to your advantage. Each time your loan interest rate, and therefore minimum loan repayment reduces, you don’t reduce the actual repayment you are making (and accustomed to) so that each future repayment is greater than the minimum, repaying your loan quicker.
This is a simple strategy to put in place as most of us are accustomed to our larger repayments and as it is money we didn’t have previously there is no impact to our back pocket, just more money being repaid on our home loans.
With smart usage of our income and funds held there are many strategies that we can put in place accelerate the repayment of loans.
Your local Loan / Mortgage Broker or Credit Adviser can provide assistance in working through the options on offer and help you establish what will suit your personal circumstances.