We all want to pay off our Home Loan sooner and there are MANY strategies that you may find along your research whether online or speaking with friends and family.
From using your Credit Card Interest Free period whilst leaving money within your Offset Account to paying your loan weekly instead of monthly – the myths and strategies available online may mathematically be achievable; however many are overly complicated and the hassle outweigh the benefit
It is for that reason we wanted to share with you one of the more common loan structures our clients are currently taking advantage of in order to help them reduce their loans as quickly as possible (without making your everyday banking inconvenient or complex).
With the current interest rate structure, you will notice (Generally) that the Fixed Rates on offer are lower than the Variable Rates. Fixed and Variable Rates each have Pros and Cons; however to keep this simple I will only reference some of these functions. The most common pain-point for Fixed Rate Loans is that additional repayments are generally limited to a specific amount and during the fixed term of the loan, those additional payments are not available should you need to access them again. Alongside this, the function of an ‘Offset Account’ generally is not available during a fixed term. Importantly, this is MOST products but not ALL products. If you’re looking for a specific product that allows Fixed Rates & Offset chat to your broker about options.
The reason this is important is that in order to reduce your loan as quickly as possible, the idea is to reduce the interest charged over the life of the loan. Let’s use a scenario of a $700,000 loan.
Assuming the entire loan was Variable at a rate of 2.69%, the loan may look something like this.
| Variable | TOTAL | |
| Loan Amount | $700,000 | $700,000 |
| Interest Rate | 2.59% | – |
| Annual Interest Charges (Approx) |
||
| Year 1 | $18,130 | $18,130 |
| Year 2 | $36,260 | $36,260 |
Note: In the interest of keeping this scenario simple, we are not ammortising the interest calculations. Please note the exact interest charges will vary on a number of factors and
Now considering the Fixed Rates are currently quite a bit lower, you may wish to ‘Hedge Your Bets’ and consider a ‘Half Fixed and Half Variable’ approach, which may look like this.
| Variable | 2 Yr Fixed | TOTAL | |
| Loan Amount | $350,000 | $350,000 | $700,000 |
| Interest Rate | 2.59% | 2.29% | – |
| Annual Interest Charges (Approx) |
|||
| Year 1 | $9,065 | $8,015 | $17,080 |
| Year 2 | $18,130 | $16,030 | $34,160 |
In this scenario, the Interest charges are approximately $2,100 lower over the 2 Year Fixed Term which is already a great saving with minimal change. But you can take this even further. Working through your budget you can easily determine how much extra you may potentially be able to pay in additional repayments into the loan during the Fixed Term, and adjust the Variable Split to align to this.
For example, let’s assume your budget may allow you to pay an additional $20,000 into the loan each year. To allow you this flexibility, we may consider to have the loan structure as below.
| Variable | 2 Yr Fixed | TOTAL | |
| Loan Amount | $50,000 | $650,000 | $700,000 |
| Interest Rate | 2.59% | 2.29% | – |
| Annual Interest Charges (Approx) |
|||
| Year 1 | $1,295 | $14,885 | $16,180 |
| Year 2 | $2,590 | $29,770 | $32,360 |
Using this structure, you are potentially Saving $3,900 in Interest over the 2 Year Fixed Term whilst also having the flexibility to use your savings to reduce the interest even further. After the Fixed Term you would again review your loan and compare lenders to ensure you are on the best deal possible with hopes of structuring the loan to again save you as much as possible. Assuming you could achieve this over the life of the loan, you would save approximately $58,000 in Interest versus a single loan on variable.
Whilst no one loan structure is perfect for all customers, this is a common structure our team are currently using to save our clients more during this time of record low interest rates. If you’d like to discuss this or one of our many other strategies to pay your loan sooner, please don’t hesitate to Schedule An Appointment with one of our Brokers today.
