How to pay a home loan faster without spending more money
Want to save money on your home loan?
This basic tip will not cost you any more money each month, but may save you 3 years or more of repayments!
I have been meaning to do some posts about how we saved money for a while. One of the most popular questions that we and our parents get is about money. Even though no one will be able to travel for a while due to the pandemic, I thought this might help someone save money during these uncertain and tough times.
Before I get into it, I want to let you know, I am not a financial adviser. Before you make changes to your home loan, you should do your own research with your own figures or ask an expert, which I am not.
I actually discovered this accidentally as I was playing around with the repayment options on my home loan (yes, I do weird things in my free time). What’s the tip? You should pay your home loan fortnightly instead of monthly. Mind blown?
Inca Building in Machu Picchu that looks like a house
Let’s run through an example.
The example
The average home loan in Australia from March 2018 was $388,1001. Let’s round this up to $400,000 to make the numbers easier. The lowest interest rate I could find on Commbank’s website2 was 2.29%. Over a 30-year period, the repayment would be $1,537 per month or the lower figure of $709 per fortnight ($709 x 2 = $1,418 per month). That’s a saving of $119 per month. This was calculated using the Australian Government’s Money Smart website3 using the unrealistic assumption of no fees.
| Repayment | $1,537 per month | $709 per fortnight |
| Total for the month | $1,537 | $1,418 |
Why not do better? To make the maths easier, instead of the minimum $1,537 per month, we decide to pay $1,600 per month. According to the Smart Money Loan Calculator, with $1,600 per month repayments, the loan will be paid off in 28 years and 5 months.
However, if we pay the $1,600 in two instalments of $800 every fortnight, the loan will be paid off in 25 years and 5 months. That’s a saving of 3 years by paying the exactly same amount of money every month!
Why does this happen? It’s because you pay less interest to the bank when you pay fortnightly. As shown in the graph below, if you pay $1,600 per month, your total loan amount is $544,099 (Original Loan $400,000 + Bank Interest of $144,099). However, if you pay $800 a fortnight the total loan amount is only $527,504 (Original loan $400,000 + Bank Interest of $127,504). You save $16,595 in this example based on a interest rate of 2.29%. My own interest rate right now is 3.16%
| Repayment | $1,600 per month | $800 per fortnight |
| Time until loan is paid | 28 years and 5 months | 25 years and 5 months |
| Total interest you pay | $144,099 | $127,504 |
The higher your loan amount or interest rate, the more you save!
If you have a home loan, I highly recommend plugging in your numbers into the Smart Money website to work out if you can save time or money on your home loan.
Good luck and let me know if you found this useful in the comments!
In summary;
Home Loan: $400,000
Interest Rate: 2.29%
Time Period: 30 years
Fees: $0 fees for the example to reduce complexity
| Repayment: | $1,600 per month | $800 per fortnight |
| Time until loan is paid: | 28 years and 5 months | 25 years and 5 months |