Home loans make up most of an individual or household’s debt.
Luckily there are ways to repay home loans faster, save on interest, and even cut the total repayment time in half (not easy, but possible).
Want to learn which strategies to use?
How to pay off your home loan faster
Well, we could tell you to double your payments or refinance for a home loan with half of your current repayment period, but that wouldn’t be very helpful, would it? That’s too obvious and really hard to do.
Instead, we’ll share a couple of strategies. You can use any one (or a combination) of these strategies to pay off your home loan in record time.
Here’s a list of the most effective strategies to pay off your home loan faster:
- Make extra payments throughout the year
- Shift from monthly to bi-weekly payments
- Refinance to a shorter-term loan
- Increase your payments when possible (pay more as you earn more)
- Make use of windfalls (bonuses, tax refunds, inheritance, and so on are examples of windfalls)
- Utilise a debt repayment program (like debt counselling and debt review)
Now, when we explain the strategies, you’ll see a key theme come up. The theme is reducing interest rates.
To help you understand why this is so important, here’s a recap of interest (and why it is so important).
Interest is the additional cost that lenders charge borrowers for borrowing money.
Usually, interest is defined as a percentage of the amount that is borrowed (interest rate) and builds over specified periods.
Here’s why interest matters:
- Higher interest rates make loans cost more money;
- longer repayment periods allow loans to generate more interest (that is owed).
Interest adds to the cost.
So, paying home loans off faster effectively reduces the principal (the amount that accrues interest). This means that the loan costs less over time and can be repaid even faster.
There’s a compounding effect.
Now, here’s how each strategy works.
Strategies for paying off a home loan faster
Make extra payments throughout the year
What you need to do: make additional payments as often as possible.
Over time, these additional payments continue to reduce the interest on the home loan. Less interest equals less debt, which shortens the repayment period.
Simple right? You’d be surprised at how effective this strategy is.
Shift from monthly to bi-weekly payments
What you need to do: pay bi-weekly instead of monthly.
Something magical happens when you pay bi-weekly. You end up making an extra payment each year.
By paying every two weeks, you make 26 half-payments in a year, the equivalent of 13 full payments.
The extra payment reduces your principal each year and, with it, the interest that you owe.
Refinance to a shorter-term loan
What you need to do: refinance your home loan to a home loan with a shorter term.
This works well if interest rates are lower now than they were when you took out the home loan. Lower interest rates on the new home loan make it more affordable, which could mean that a shorter repayment period becomes affordable.
It’s likely that it’ll cost more each month, but this will cut the repayment time and save a lot of money in the process.
Remember to carefully review any new terms and be mindful of fees (do the maths).
Increase your payments when possible
What you need to do: add to the monthly repayment amount as often as possible.
Got a raise? Just paid off a credit card or auto loan? Making extra money? Perfect! Allocate some of that capital to your monthly repayment amount.
By now, you get the idea. A higher monthly repayment reduces the amount and interest. Together, this accelerates how fast the home loan gets paid off.
Make use of windfalls
What you need to do: put all windfalls (bonuses, tax refunds, and inheritances) toward your home loan.
Sure, it’ll be fun to spend, but using windfalls to make extra home loan repayments is worth more in the long run.
Utilise a debt repayment program
What you need to do: apply for debt counselling to make debt repayment easier.
This is a great strategy for anyone that’s a little behind or having trouble keeping up or keeping track of all of their debts.
Debt counsellors can create a tailored debt repayment strategy and leverage debt review to make monthly debt repayment more affordable and consolidate multiple debts to simplify repayment.
In some cases, the repayment term may extend, but all-in-all, making payments on time will ensure that the home loan gets repaid faster than when payments are missed (or partial).
Struggling to keep up with your debt?
Our team can help make your debt affordable once again.
We help thousands of South Africans to reduce their monthly debt repayments, protect them from legal action, and keep their assets — our team can help you too.
Let’s check out the advantages (and disadvantages) of paying off a home loan early.
Benefits of paying off a home loan faster
Saving money isn’t the only reason why someone might want to repay their home loan as fast as possible. Of course, saving money is a big one, but there are other important benefits to remember.
Here are some of the most significant benefits of paying off a home loan faster:
- Saving money on interest
- Reducing the total amount of debt
- Building home equity
- Achieving financial freedom
- Peace of mind
Penalties for paying off a home loan early
Check your home loan agreement before you ramp up your home loan repayment. Some agreements include penalties.
(Not cool, Lenders.)
Here’s why they do it:
Lenders rely on interest to make money and offset their risk. When a home loan is repaid faster, there’s less time for interest to build. Which means lenders make less money. So, some lenders include a prepayment penalty to prevent borrowers from paying off their home loans earlier.
What you can do:
Go through your home loan agreement or contact a professional to help you. If you have penalties in your agreement, then you might be able to negotiate with the lender or look at other refinancing options.
As always, do your maths. Make sure that outcome is financially beneficial for you.
Anyone can repay their home loan faster. It boils down to increasing payments and reducing the interest. These strategies will help.
Now, are you gonna take care of your home loan and pay it off in half the time? We’re rooting for you.
We can help with the strategy, “Utilise a debt repayment program”, visit our homepage at My Debt Hero to see if you qualify to reduce your monthly debt repayment.