Picture this: you’ve just bought the house of your dreams. A few days pass by and you start thinking about the loan attached to the house, which needs to be repaid – a period that usually lasts anywhere between 20 to 30 years. It’s alright to think of the implications of taking out the loan, but there are ways to manage these stressful thoughts and sleep a little more comfortably in your dream home.
The goal for anyone with a long-term loan is to reduce its cost. The first step is to pay in a large deposit – it’s not a train smash if you didn’t manage to do this, as you can still reduce the cost of your loan with the tips below:
Every extra cent counts
The golden rule here is that the more you pay, the more you save. Once all of your necessary expenses are covered, think about putting any excess money towards repaying your home loan. If you do this consistently, you can reduce your repayment period by a few months or even years!
Use one of the many free calculators online to calculate how much interest you can save, or by how many years you can shorten your loan term if you add a little extra to your repayment each month. Seeing the significant impact of a small contribution will help to motivate you in the long-run.
There’s also no set time for when you should start contributing extra money towards your loan repayments – start contributing excess money as early as you can to make your repayment period as short as possible.
Saving money with access bonds
Most home loans these days are access bonds – this allows you to deposit surplus funds into your home loan account and access the surplus funds if you ever need it in future. Park your short-term savings, emergency fund or any other short term capital that would normally go into a savings account, in your home loan.
This means your loan balance will be lower, and since the interest portion you need to repay the bank is calculated daily and charged once-off at the end of the month, the interest due will be calculated on a smaller balance.
You’ll still pay the same repayment amount, but more of that will go towards paying off your capital (the asset) and less towards the interest (the cost of the loan).
Extending you loan period
Just don’t – unless it’s absolutely necessary. You don’t want to be tied into debt for an even longer period of time. Not only does this mean that you end up paying more interest, as interest is calculated on a daily basis (so more days = more interest), but you may also be affected psychologically. You may think “If I can extend my home loan, I should consider extending my other lines of credit”. It’s a slippery slope, which you definitely want to avoid!
If you really can’t avoid having to extend your home loan, make sure you can afford the repayments before you make the decision. Your advisor should be able to calculate what you can and cannot afford.