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Being proactive with your home loan can lead to significant savings.
Here are a few strategies that will help:
Making a substantial down payment at the outset can significantly reduce your loan balance. Lenders perceive borrowers who contribute at least 20% of the property value as less risky. Moreover, those with a loan-to-value ratio (LVR) below 80% often secure lower interest rates. By increasing your deposit, you can also avoid paying the Lender's Mortgage Insurance (LMI), which is typically required when you have a deposit that is less than 20% of the property's value.
| Home purchase price: $700,000 | 20% Deposit | 30% Deposit |
|---|---|---|
| Deposit amount | $140,000 | $210,000 |
| Loan amount | $560,000 | $490,000 |
| Interest rate | 5% | 5% |
| Loan term | 30 years | 30 years |
| Monthly repayment (principal and interest) | $3,007 | $2,631 |
| Total interest paid (over 30 years) | $522,233 | $456,954 |
| Home purchase price: $700,000 | Deposit amount | Deposit amount |
|---|---|---|
| 20% Deposit | $140,000 | $140,000 |
| 30% Deposit | $210,000 | $210,000 |
| Home purchase price: $700,000 | Loan amount | Loan amount |
| 20% Deposit | $560,000 | $560,000 |
| 30% Deposit | $490,000 | $490,000 |
| Home purchase price: $700,000 | Interest rate | Interest rate |
| 20% Deposit | 5% | 5% |
| 30% Deposit | 5% | 5% |
| Home purchase price: $700,000 | Loan term | Loan term |
| 20% Deposit | 30 years | 30 years |
| 30% Deposit | 30 years | 30 years |
| Home purchase price: $700,000 | Monthly repayment (principal and interest) | Monthly repayment (principal and interest) |
| 20% Deposit | $3,007 | $3,007 |
| 30% Deposit | $2,631 | $2,631 |
| Home purchase price: $700,000 | Total interest paid (over 30 years) | Total interest paid (over 30 years) |
| 20% Deposit | $522,233 | $522,233 |
| 30% Deposit | $456,954 | $456,954 |
A: A difference of $65,279
By paying your loan balance in big chunks, you can decrease the amount of interest you pay over the life of your loan. Unlike your regular repayments – much of which goes towards paying interest – 100% of lump sum payments go towards reducing the loan principal. So put your tax refunds, work bonuses, or inheritance money to work for you!
Jack has a 30-year mortgage of $500,000 with an interest rate of 6.5%. If he made a lump sum payment of $20,000 in the first year, Jack could potentially save around $98,545 in interest and reduce his loan term by more than 3 years.
This is because the extra payment reduces the balance, and the interest is calculated on the reduced balance for the rest of the loan term. The earlier Jack makes lump sum repayments, the more he saves.
A: $98,545 and 3 years off the loan
When you become more financially comfortable with extra ongoing funds at hands, you may want to consider reducing your loan term. With a shorter term comes a higher minimum repayment, so it’s important that you can comfortably afford the increase.
Let's say you have a $350,000 mortgage. Your monthly repayments are $2,108 at 6.04%. After 30 years, your total interest would be $408,678. Reducing your home loan term by 5 years would mean slightly higher repayments of $2,264 per month for 25 years. Your total interest paid would be $329,087.
A: Savings in total interest paid of $79,591 and owning your home outright much sooner
To effectively manage your finances, keep consistent repayments even when interest rates drop. This speeds up loan repayment, as you pay less in interest. If you need to access this money, variable rate home loans often offer a redraw facility that allows you to tap into extra funds when needed. Maintaining mortgage payments avoids significant adjustments in case of future rate increases.
Mr and Mrs Li have a $500,000 home loan. A 0.25% drop in interest rates would reduce their payments by $76 a month.
If they maintain their repayments at this lower interest rate, this would equal $27,360 in savings over a span of 30 years.
A: Approximately $27,360 on a $500,000 mortgage
An offset account is a savings account linked to your home loan that can help you pay off your mortgage faster. The balance in this account offsets the interest charged on your home loan, meaning you pay less in interest.
If Jessica has a home loan balance of $300,000 and an offset account with a balance of $50,000, she'll only be charged interest on $250,000. At an interest rate of 3%, she could potentially reduce her home loan term by approximately 3 years and 11 months.
A: 3 years and 11 months
Lastly, a simple but effective way to pay off your home loan faster is by increasing the amount of your regular repayments. This can be done by simply contacting your lender and requesting to increase your repayment amount.
Managing your payments can be done in several ways:
Jamie has a 30-year home loan of $300,000 with an interest rate of 6%. If he only makes the minimum monthly payment, he'll repay approximately $647,515 over the life of his loan. However, if Jamie increases the monthly repayments by an extra $100, he could save approximately $53,346 in interest and pay off his loan 3 years and 11 months earlier. Remember, every little bit extra can make a significant difference. The sooner you start, the more you can save!
A: Yes – almost 4 years off your loan term
Learn more: Should you refinance your home loan?
While paying off your home loan faster can be beneficial, it's important to consider some possible downsides:
Pouring all of your excess cash into your home loan can leave you cash-poor, making it more difficult to handle unexpected expenses.
Using extra money to pay off your home loan faster could mean missing out on other potentially lucrative investment opportunities.
There are no fees for making up to $10,000 in extra repayments in 1 year with the HSBC fixed rate home loan.
Get in touch with us for more information on how to pay off your home loan faster. We'd be happy to help you find the best solutions for your financial goals.
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This article is intended to provide general information of an educational nature only. This information should not be relied upon as financial product advice as it does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of the information to your own circumstances and seek independent legal and financial advice prior to making any investment choice. There are risks associated with any investment and this document is not intended to list all of them in respect to any particular investment opportunity. Prices, levels and indications contained in this document are illustrative only and may not represent future performance. HSBC does not warrant or represent the performance of any investment opportunity.
Disclaimer: Credit provided by HSBC Bank Australia Limited ABN 48 006 434 162. Australia Credit Licence 232595. Terms, conditions, fees, charges and HSBC lending criteria apply. This article does not take into account your personal or financial situation. Please consider a relevant Product Disclosure Statement, available at hsbc.com.au or by calling 1300 308 008 before making a decision about this product.
