Twenty-five years… that’s a typical home loan term in australia. That’s 25 years of regular home loan repayments — and with some lenders — rate increases and unexpected fees until you own your home outright.
What if that period could be shorter? What if you could save yourself thousands of dollars in the meantime?
The good news is that you can take steps to helping to reduce the life of your loan. See the 9 smart moves you can make to pay off your home loan sooner and save you thousands.
1. Be wary of honeymoons
There are some kinds of honeymoons that you don’t want to find yourself on and home loans are one of them.
A honeymoon period or rate refers to an introductory home loan offer, such as a periodically lower interest rate or cash back. Although they often sound great, they are often too good to be true. After six to twelve months of lower home loan interest rates, some lenders revert you to a rate that is often higher than the market average. While you’re paying less initially, you often end up paying more over the remaining 20+ years of your loan. For that reason, it’s important to look at the home loan comparison rate that factors in fees, charges and any changes to your rate before buying in.
Don’t let a tempting introductory offer distract you from other home loan features like flexible extra repayments and fee free offset or offset sub-account that can help you pay your loan down faster. Choosing a loan with a transparent lender that offers the best deal from the start could help you shave years off your repayments, before you’ve even started.
2. Use an offset sub-account
Owning your own home outright might be your ultimate financial goal, and to help you get there faster and reduce the amount of interest you pay on your loan, make sure you make the most of using a offset sub-account.
How does and offset sub-account work?
You consolidate your finances into one account, with any money in your offset sub-account used to offset the balance of your loan, which then reduces how much interest you pay.
For example, if you’ve got a $500,000 home loan with a 3% interest rate, repaying principal and interest over 25 years, you can end up paying around $14,800 in interest the first year. However, if you parked $50,000 into your offset sub-account from the start of your loan, you’ll only pay interest on a balance of $450,000, dropping the interest you pay and creating $1,500 in savings per year.
Unlike many traditional lenders, the nano offset sub-account carries no fees. It helps reduce the interest you pay by offsetting the balance of your loan, while retaining access to your funds with a nano visa debit card and payments. You can make extra payments into your offset sub-
Account and redraw them as necessary . We also provide a feature called vaults as part of your offset sub-account, which allow you to tuck funds away. We’re not exaggerating when we say it’s one of the most flexible offset sub-accounts in the aussie market.
3. Switch to a lender with better rates and no fees
Australia’s big 4 banks — commbank, ANZ, NAB and westpac — may be the biggest, but they don’t always have the best rates. Online lenders like nano often offer more competitive rates than the major banks, thanks mainly to their streamlined technology and lower overheads.
Next time you’re shopping around, make sure you use comparison rates to give you a more accurate loan cost. The comparison rates include the “hidden” fees that some lenders charge, such as exit and account keeping fees. Ideally, look for a lender like nano that has no nano fees and offers a comparison rate the same as the interest rate. 1
On a $500,000 home loan, repaying principal and interest over 25 years, if you were to move from a rate of 2.5% to our current great 1.99% owner-occupied principal and interest variable rate, you could either reduce your monthly repayment by $126 per month or keep your repayment the same and pay your loan off 21 months faster. You’d also save $37,874 over the life of your loan.
This shows you that what may seem like a relatively small differential in price, can lead to a big difference in the long run. 2
4. Don’t get stung with early repayment charges and exit fees
Whether you’ve come into a lump sum of money or you’re refinancing or selling a property, there are some circumstances that may require you to break your home loan contract. This is where some lenders may apply early repayment fees, also known as break fees or early termination fees. That’s right — you’re being penalised for paying down your loan faster or exiting your loan for a better deal.
If you want to avoid these costs, opt for a lender like nano that charges no early repayment or exit fees. This helps keep us honest and ensure that we are always offering you the best rate and service, and if we are not, you are free to leave. Flexibility to change in an ever-moving market is hugely important. If your lender can’t keep up with the trends, it may be time to reconsider whether they’re a good fit for you.
5. Make lump sum payments when you can
Large one-off payments have the potential to shave years off your loan.
Christmas bonuses, tax returns and generous gifts from mysterious relatives may sound like the perfect opportunity for a holiday. But, seeing as though it might be a while until we are travelling again, take the opportunity to make a lump sum payment on your home loan.
Payments will help reduce the principal on your home loan – which is how much is due before interest – helping to reduce the interest you pay.
6. Review your home loan regularly
Just like you set reminders to visit the doctor or dentist every six months, it’s a good idea to set time for a home loan health check, and making sure your home loan is still working for you.
Does the loan you signed up for ten years ago stack up to the low-rate, no-fee home loans digital lenders like nano offer?
Our home loan refinance calculator allows you to compare your current loan against one with nano, so you can see how much you’d save over the life of your loan and on monthly repayments.
7. Get the best loan for you
The comparison rate on your home loan is essential, but it’s not the only feature of a good home loan.
Do your homework and make sure your loan has all the features you want and none of the features you don’t need — many of which come with fees. Account fees, break fees, maintenance fees, exit fees and offset account fees are only the start of the list of unnecessary costs.
When it comes down to it, everyone is different and will look for different things.
Easy access to a redraw or offset sub-account facility may be essential to some, but not to those who don’t plan on redrawing their funds. A couple that plans on making extra repayments may prefer a loan without a break fee, whereas another may stick to the minimum repayments for the life of the loan.
Nano offers a home loan with a low comparison rate, no nano fees, offset sub-account, nano visa debit card, and mobile app.
8. Do without some little luxuries
Doing without little luxuries can hurt, but it has to be said. Buying a home is one of the most significant investments you’ll make in your life, and often some spending habits will need to change once you’ve taken on a home loan.
Put simply, the more cash you have available, the more you can put into your home loan, the faster you’ll be free of your home loan or in a position to upgrade or even buy an investment property. Consider what you can reasonably cut back on without drastically changing your way of life.
For example, if you’re buying lunch at work five days a week ($100), online shopping once a week ($150) and ordering take-away at least one night per week ($100), that’s $350 a week or $700 a fortnight that could go towards paying off your home loan quicker.
Even just cutting down how often you’re indulging in little luxuries can go a long way.
9. Consider a digital lender
Digital lending is a relatively new thing, and for some this can be intimidating. First, it’s important to understand the difference between traditional lenders and digital lenders so you can make the right choice for yourself.
Nano was founded from a desire to deliver fast, simple and fair home loans that work for you, the customer. Nano offers great home loan features like a free 100% offset sub-account, nano visa debit card and mobile app – but without the things you don’t want — like hours of paperwork and hidden fees!
Nano’s innovative technology can assess and approve loans in minutes, not weeks – with no paperwork. This means that you can skip the hassle of the traditional refinancing process and reap the rewards of your new low rate sooner.