Depending on your circumstances, making additional repayments on your home loan could form an important part of your financial plan. With interest rates at record lows, now may be the perfect time to put that extra cash towards owning your home sooner – for less.
It’s easy to underestimate the power of these enforced savings over the long term, but if you crunch the numbers, it becomes crystal clear. Let’s say you have a home loan of $300,000 with an interest rate of 4.5%. If you make additional repayments of $200 per month (or $50 a week – that’s lunch money!), you would save almost $60,000 in interest and reduce your loan term by over six years.
What if I need the money back?
Don’t worry. There are two main options to ensure you can reverse your repayments if necessary – a 100% offset account, or a redraw facility. Check with your bank or with me first if you are unsure whether your loan has these features.
Offset Account: This is a separate savings account that is linked to your home loan. The amount held in your offset account is subtracted from your loan balance each day, reducing the interest charged. You can withdraw funds easily at any time.
For example, if you have a home loan of $300,000, but you have $20,000 in your offset account, your interest is calculated on $280,000.
Redraw Facility: This allows you to withdraw any additional repayments you have made on your mortgage through the home loan account itself. You usually need to apply to get the funds back and some loans carry fees for this feature.
For example, if you have made additional repayments of $20,000 on your $300,000 home loan, interest will only be charged on $280,000. This $20,000 is available for redraw if you require it down the track.
It goes without saying that if you redraw the money, you will no longer be making those savings on your mortgage.
Please give Smartline Rockingham mortgage advisers a call anytime if you need more information about making additional repayments on your home loan.