How frequently should you pay off your home loan?
Back in the 1990’s, the banks made a lot of noise about loan payment frequencies. If you pay fortnightly, you could save months or even years off your home loan and thousands of dollars in the interest along the way. The fact was that people simply halved their monthly loan payment and paid that amount off every two weeks. The trick here had nothing to do with how frequently you were paying the loan off. By making 26 loan repayments in a year, you were making the equivalent of 13 months of payments in a calendar year, rather than 12 months.
The above case is easy to manage for those that are paid on a fortnightly basis – money comes in, money goes out in a simple rhythmic routine. But what if you’re paid weekly or monthly? It can become difficult to balance the budget when in some months you’re making two fortnightly payments and in other months you’re making three.
The best thing to do here is to open up a home loan calculator. Enter your current loan amount, interest rate and the number of years you have remaining. Typically, most calculators will have a slider that will allow you to see what the loan payments look like if you try paying it off sooner. Keep moving the slider until just before the loan repayments become too high for you, and see how many years you’ve saved by increasing the amount.
Once you’ve worked out the repayment amount you’re comfortable with, set that as either your weekly, fortnightly or monthly loan payment and match it to the frequency of your pay cycle. If possible, set the repayment up so that the money is transferred from your account one or two days after you expect to get paid. That way you’ll never get used to having your home loan repayment in your bank account, and your money is working at reducing your interest as soon as it’s paid to you.
If you’re in a relationship and your partner is on a different pay cycle than you, nominate which income will go towards the home loan payment and set your payment frequency to that. Depending on your income levels, household budget and loan size, it might even be possible to have one wage directly deposited into the home loan.
After three to six months, reassess your loan repayments to see how you’re tracking. If you feel comfortable with the level of repayment that you’re making, aim for a new challenge by increasing your repayment again. Keep the increases modest so that you can easily grow into them, and after a period of time you’ll find your sweet spot. Just make sure that if you have a change of job and the payment cycle is different, contact your bank to change your payment frequency.
Remember, a 30-year loan is a long time to be paying back your debt. Keep repayments higher than your minimum and you’ll save a lot of time and interest.
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