Five tips to shrink your home loan

When you apply for a home loan, you commit to a 30-year debt. At least that’s an option lenders may give you as most home loans are calculated to run over 25 or 30 years, with the minimum monthly repayments calculated to meet that timeframe.

But your home loan doesn’t have to rule your life forever. Follow these five smart tips to shrink your debt and own your home faster.

1. Have an offset account

A surefire way to shrink your home loan is to set up an offset account – a savings account that is linked to your mortgage, where the money in the savings account “offsets” the balance of the loan and saves you money on the interest. For example, if you have $20,000 in your offset account and owe $300,000 on your home loan, you only pay interest on $280,000.

“An offset account is a terrific way to pay your mortgage fast because it’s not that hard to do,” says Marc Bineham, director at Noall & Co Financial Planning. “And it can take three or four years off the mortgage.”

2. Pay more often

Another simple tip that won’t cost you any money but can save you thousands, is to pay your home loan weekly or fortnightly rather than monthly. For example, if your repayments are $2000 a month, you can split the amount to $1000 each fortnight. This way, you end up making more repayments over the course of the year, and the life of the loan, without paying more.

“There are 26 fortnights in a year, so you end up with a thirteenth month [of repayments] at the end of the year,” explains Bineham. “This can reduce a 25-year mortgage by five to seven years.”

3. Increase payments

Your lender helpfully calculates the minimum repayments required to pay off your home loan within the 25- or 30-year lifespan of the loan. The good news is that every extra dollar you pay above the minimum repayment amount goes straight towards the principal, which cuts your interest bill and shrinks the life of your loan by several years.

Make sure your loan allows you to make extra repayments and that there are no fees for doing so. Some home loans with fixed rates don’t allow extra repayments and your lender may limit how much extra you can pay over the life of the loan.

4. Deposit lump sums

Put your annual tax return, bonus, medicare rebates or any unexpected windfalls back into your home loan. Every little bit goes towards reducing the principal of the loan and once again can dramatically shrink your loan.

5. Shop around for a cheaper rate

There are plenty of competitive interest rates to be had on home loans so if you are paying too much, shop around for a great rate. It’s important, however, to do your homework to ensure switching home loans doesn’t cost you more in loan application fees. Even better, you can ask your current lender to match a better rate to avoid refinancing costs.

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