No one enjoys being in debt, and the sooner you can pay it off, the better. What many banks won’t tell you is that there are several strategies that may reduce the total interest you pay on your loan, potentially saving you money over the course of the loan. At Cherry Lending & Finance, we’re dedicated to helping you achieve your financial goals, so we’ve put together a few valuable tips specifically designed to help you get there.
Change your loan repayments to fortnightly or weekly
Most people pay off their loans in monthly instalments, but did you know that by switching to fortnightly or weekly repayments this could reduce the total amount of interest payable? This simple adjustment could potentially save you money over time.
So, how does it work?
Each day, banks calculate your loan’s daily interest by multiplying your balance by the interest rate and dividing it by 365. At the end of the month, they add up these daily interest charges, which is the amount you see on your statements. If you make weekly or fortnightly payments, the interest is charged according to that schedule.
Since interest on a loan is calculated daily, increasing the frequency of your repayments can help you reduce the term of your loan as you’ll be paying an additional month per year.
Let’s say your monthly repayments are $2,000, totaling $24,000 a year. If you switch to fortnightly payments of $1,000 or weekly payments of $500, you’d end up repaying $26,000 a year. Except for February, most months have more than 28 days, and those extra days translate into additional repayments. While it might not seem like much each month, over the course of a year, these extra payments can lead to savings.
Make additional lump sum payments
Switching to fortnightly or weekly repayments is just one strategy to potentially reduce interest, but it’s not the only option. Another potentially beneficial method is making additional lump sum payments, which can impact both the total amount of your home loan repayments and the time it takes to pay off your debt. Every extra dollar you contribute directly reduces your principal, meaning you’ll pay less interest over time and potentially reduce the team of your loan.
For those with a variable home loan, most lenders allow unlimited additional payments without any penalties, giving you the flexibility to pay down your debt whenever you have extra funds available. On the other hand, if you have a fixed home loan, the rules are a bit different. Typically, lenders will cap the additional repayments at up to $10,000 per year during the fixed rate period without you being penalised.
Check your financial situation
The more frequently you make your repayments, the less interest you could be paying which could reduce the term of your loan. Adding extra payments can speed up this process even more. However, it’s important to ensure your repayment schedule fits your financial situation to avoid unnecessary strain. For most people, switching to fortnightly or weekly payments doesn’t feel like a big change, but it can lead to more favourable outcomes. Talk to your mortgage broker to find out which option works best for you.
A free service that makes the home loan process so much easier
No matter where you are located across Australia, our dedicated team is prepared to assist you in achieving your financial goals. At Cherry Lending & Finance, we are committed to providing you with the support and guidance you need to thrive in your property and financial endeavours. If you’re confused about how to get a home loan, talk to us!
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The figures displayed are general in nature and is not to be taken as financial advice. Your full financial situation would need to be reviewed prior to acceptance of any offer or product
