How to repay a home loan in record time
The Daily Telegraph money reporter discusses how to save interest on your mortgage with our contribution.
Go early and go hard – it’s the best way to wipe out a mortgage with record-breaking speed.
Home loan interest can be confusing, and mortgage advisers say up to half of borrowers don’t realise how it’s calculated so they miss out on fast repayment.
One myth is that all interest is added upfront, says mortgage broker Rebecca Jarrett-Dalton.
“Interest is charged on the daily outstanding balance – while the balance is highest the interest is highest, hence it appears to be front-end loaded but it isn’t,” she says.
“The sooner you can attack the balance the more interest you will save over the life of the loan.”
Jarrett-Dalton suggests borrowers match mortgage repayments to their pay cycle to potentially create more frequent payments and interest savings.
Rebecca Jarrett-Dalton says attacking your mortgage will deliver big interest savings.
She says borrowers should avoid separate accounts for savings and instead use mortgage offset accounts or redraw facilities to maximise money saved.
“In terms of interest savings offset and redraw are the same, but with redraw you might have some limits, for example a minimum of $1000,” Jarrett-Dalton says.
“But a redraw is more out of sight, out of mind.”
Charter Finance managing director Dean Perlman says interest rates were considered cheap five years ago when they were 5 per cent, and that was double the amount being paid today.
“Ultimately when the world recovers, rates will increase again, so it’s better to pay more off now and let it benefit you,” he says.
Perlman is also a fan of mortgage offset accounts to help pay off loans faster.
“Any funds held in an offset account will work towards reducing the total interest payable for that particular month, resulting in less interest being charged,” he says.
“It is typically recommended to pay off as much as one can from the first day you have you loan, as day one is when the greatest portion of interest is charged.”
Perlman says borrowers should look seek better deals.
“Lenders typically offer new clients better rates than they do existing clients,” he says.
By refinancing to a new lender, and keeping your monthly repayments the same as they were, this will reduce the overall interest and loan term.”