Making voluntary payments on your mortgage can help you save money and own your home sooner. In this article we look at the benefits of making extra repayments and other alternatives for making your money work harder.
Home ownership has long been touted as the great Australian dream, but nobody wants to live with a mortgage forever. If you can afford to pay more than the minimum repayments on your mortgage, it may help you save money in the long term.
How does it work?
Your minimum monthly repayments go towards paying off the principal of your loan (that is, the amount you borrowed to buy your home) as well as the interest that is accrued on that balance. Any extra repayments you make above the minimum set by your lender go towards the principal of the loan rather than the interest.
That means you will pay less over the life of your loan because you will reduce the interest charged on the balance. Over the life of your loan that could add up to tens of thousands of extra dollars in your pocket.
What are your options?
There are three options for making extra repayments which can be effective in minimising your mortgage debt.
1. Switch to fortnightly payments
Firstly, you can switch to paying fortnightly, so that you pay half your normal monthly repayment each fortnight. Plus, there are 26 fortnights in a year so you’ll end up paying the equivalent of 13 monthly installments, not 12. That’s an extra month’s repayment you may not even notice.
2. Make a lump sum payment
Another strategy is to make one-off lump sum payments when you have some extra money, such as your tax return, a work bonus or an inheritance. Once again, by reducing your principle, you’ll pay less interest in the years ahead.
3. Pay a little extra each month
If you can afford to, paying more than the minimum required each month is worth considering, and even a small amount can make a big difference over the term of the loan.
For example, on the average Australian mortgage of $363,600 with an interest rate of 3.99%, if you start paying an extra $100 each fortnight five years into your mortgage, you could save a total of $21,469.82 while cutting two years and 9 months off the life of your mortgage.
Of course, the more you pay, the more you could save. You can use the Aussie Extra Repayments Calculator to see how much you can save.
Consider an offset account
If your goal is to pay off your mortgage faster and save on interest, you could consider an offset account.
An offset account is a savings account linked to your mortgage so that any money in your offset account reduces the interest charged on your loan. For example, if your loan size is $400,000 and you have $10,000 in your offset account, you only pay interest on $390,000.
Other options for making your money work harder
If you have extra savings, you may want to consider other ways of making your money work for you.
Depending on the amount of your extra savings, you could consider buying an investment property and you might even benefit from tax deductions through negative gearing.
Is there a reason you might not want to pay off your loan early?
Though you may want to pay off your mortgage as soon as possible, there could be scenarios where you might not do this and instead choose to put your money into an offset account.
For example, if you bought an apartment and want to upgrade to a house down the track, it may be better to put any extra money into an offset account so you can have access to it for a deposit for a home when the time comes. You then might have the option of using the apartment as an investment property, thereby starting a property portfolio.
Let Aussie run the numbers for you
Your local Aussie Broker would be pleased to talk about how you could get a home sooner and show you how these different scenarios could work for you for your home loan.
You may also find these articles helpful as you plan for the years ahead: