The simplest way to minimise interest repayments over the life of your loan is to allocate as much income as you can to your mortgage while resisting the urge to reborrow anything through a redraw facility. The reality is that those who successfully pay down their home loan faster make regular repayments that are larger than the minimum repayment obligation set out in the loan contract (as long as this doesn’t attract penalties or fees). Making irregular extra repayments is also an excellent strategy for those with enough income or control over their expenses.
You may be able to achieve excellent interest savings by adopting simple cashflow strategies. You will also accelerate your level of equity – the portion of your home value that you own outright.
After making extra repayments you may be able to re-borrow these funds through a redraw, or take a repayment “holiday” if you have an urgent reason to stop paying for a short period. Redraws may be an effective solution for your needs but should be approached carefully – they may end up costing you a lot in interest payments from the day you take the money out until the day the loan is fully repaid.
Generally, you will be charged the maximum amount of interest over the life of the loan if you do nothing except follow the minimum repayment obligations that are set out in the loan contract. The way to minimise the interest you pay is to do the opposite – repay as much as you can as early as you can. Here are some ways you can do this:
- make lump sum payments (perhaps if you get your tax return back or a bonus at work);
- pay more than the minimum monthly, fortnightly or weekly repayment;
- take advantage of product features such as an offset account.