Additional Repayments Tips
Over the life of a home loan - sometimes up to thirty years - your financial circumstances can change dramatically. Starting a family, changing jobs, children leaving home and many other factors can alter your financial circumstances over the term of the loan. A home loan that is right for you at the beginning has the potential to become the worst mistake you ever made.
Which Home Loan?
Flexibility is a key. The ability to make additional repayments on a home loan is something to consider for anyone contemplating possibly the largest and most important investment they will ever make. By making additional repayments you can significantly cut down the length of a loan, resulting in potentially huge savings in interest payments overall.
Repayments on a home loan cover both interest accrued on the remaining loan amount, and the actual principal of the loan– that is, the original amount borrowed. Any additional payments made will go towards paying off the principal amount, resulting in lower interest charges. Substantial savings can be made just by putting a little extra into your home loan each month.
Additional Repayments Example
Angus and Isobel have recently bought their first home. After all costs have been taken into account, they have a home loan of $300,000 to be repaid over twenty five years. With an interest rate of seven per cent, the total interest paid on their loan is calculated at $336,101 making a grand loan total of $636,101.
By making regular additional repayments of just $50 a month, Angus and Isobel can cut down their loan term to twenty three years and six months. Interest payments will also be cut dramatically to save $23,559 in interest over the life of the loan.
Let's say Angus and Isobel can afford to put an extra $150 a month into their home loan. They would save over $61,000 in interest and almost four years on the life of their loan.
How Do I Make Additional Repayments?
Making additional repayments on your home loan can make a huge difference. Even if regular payments are not possible, irregular, one-off payments whenever your financial situation allows can also save you money in the long term.
Which Loans Allow Additional Repayments?
Home loans are customarily set-up either as fixed or variable rate loans, or a mixture of both. In general, variable home loans offer the most flexibility where additional repayments are concerned, with many allowing customers to make an unlimited number of additional repayments throughout the life of the loan. In many cases, this is a free service offered as a standard feature of a variable rate home loan.
Be aware of making additional repayments on fixed-rate or 'no-frills' (basic) home loans. Lenders may charge a fee each time this occurs. You may also find that by reducing the total period of the loan, further fees and charges may be levied to pay it out early. In some cases, these fees can be substantial enough to negate the benefits of making the additional repayments in the first place.
So, whichever way you decide to go with your home loan, don't forget to consider the advantages available to you through additional repayments. Whether you make this a regular payment or irregular one-off payments whenever you have some spare money, the financial benefits can be considerable - which is great news for everyone.
As always, please talk to a qualified financial advisor if you would like advice regarding your personal situation. Information in this article is general in nature, and different products from different institutions will all have different fees and charges attached to different actions. Please contact each institution, or visit their website, for full details of fees and charges.