No pain, no gain

Bridie Smith | November 27 2002 | The Age (subscribe)

How can you save thousands by cutting the life of your home loan.

Discretionary income is something many borrowers locked into home loan repayments can only dream about.

However, those borrowers who are prepared to show some discretion can slash the life of their loan.

The pain of an accelerated repayment program will be rewarded with the gain of your very own title deed. Plus the freedom to enjoy financial freedom in 20 years time instead of 25.

Here are a few tips on how to shrink the life of your loan and enjoy many of life's little luxuries sooner rather than later:

Pay more, sooner
With the official cash rate still low at 4.75 per cent, now is a good time to get ahead. Consider a low-rate variable loan or a fixed loan that allows extra repayments, at no charge. This will give you the option of making repayments as if rates were higher. This serves two purposes: Firstly, you are shortening the life of the loan and, secondly, if rates do rise, you won't be stung.

Time is money
Essentially, paying less interest on your loan comes down to one thing: Paying off the loan as fast as you can. A $200,000 loan at 8 per cent over 25 years means monthly repayments of about $1543. If the same loan is repaid over 20 years, the monthly payment will be a heftier $1672. The advantage is the total amount repaid over the life of the the loan will be reduced.

Repay more frequently
Depending on your income patterns, fortnightly repayments may be worth considering. The strategy of splitting monthly payments works because borrowers can take advantage of the fact that there are 26 fortnights in a year, but only 12 months. This means effectively making 13 monthly payments every year. And this can make a big difference to cash flow. Paying fortnightly rather than monthly also will reduce your exposure to interest rate rises.

Get the principal out of the way
Going in hard early in the life of your loan may be difficult, but it has its benefits. An effective method is to direct the early repayments at the principal, not the interest. By trimming the principal you are in effect trimming the interest.

Consolidate
Interest rates are low now, but things change and borrowers should consider not only how a rate rise would affect their home loan, but other personal debt. One of the best ways of keeping track of debt is to consider packages that consolidate all of your costs. Often, the credit card rate will be higher than the home loan, so borrowers can benefit from transferring personal debt to their home loan and pay a reduced rate.

The rewards will come later
Money saved from lifestyle changes can go towards reducing the principal. In theory, this can mean cutting back on bought lunches and walking or cycling instead of driving. The dollars saved soon add up.

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