How to Cut Years Off Your Home Loan
Cutting years off your home loan is not impossible.
The banking industry is a competitive market. Refinancing is a common approach to reducing the loan term, however this doesn’t necessarily mean you have to switch banks to get better terms. So it’s worth reviewing your home loan with your current bank first to see if you can improve your financial position. Here’s a general guide to reduce the term of your home loan.
How often should you review your home loan?
There is actually a difference between reviewing your home loan and refinancing your home loan. As a guide, you should review your home loan every six months or so. This does not mean you have to talk to your bank or another lender, it just means you should keep an eye on the loan market and make sure your loan still suits your current situation.
On the other hand, refinancing your home loan is more involved with planning to switch your loan completely. You can refinance your home loan by comparing different banks and their offerings every two years or so. Any sooner than this timeframe and the cost of switching could outweigh the financial benefits.
Things to consider when reviewing your home loan
The first thing to think about is your current situation – ie your personal goals and your financial position. Maybe your living arrangements have changed lately or you and your family about to have a baby and you will lose some income for a period of time.
Then you should consider the features of your current home loan and what you can and can’t do with that loan. In other words, does your home loan still meet your needs?
Other things to think about are the interest rate and monthly repayments on the home loan.
What does refinancing involve?
Not everyone realises that refinancing a home loan actually involves completing a brand new loan application. Everything you went through to get the original home loan, you will need to do again. ie. providing documentation, getting bank approval, etc. You will go through the full process of documentation, approval and finally, refinancing.
One last thing to consider is whether you are moving all of your banking bank accounts, credit cards, etc.) or just your home loan itself.
What are the pros and cons of refinancing?
Interest rate and customer service are generally the main reasons people move to another bank. But it is advisable to look past the interest rate to find better offers and loan packages that have better features that suit your situation more appropriately. It’s not just about the interest rate – another bank may have a more suitable product or be able to approve the loan to meet your specific objectives.
Another reason people move banks is that, for some reason, they find their bank not easy to deal with and that’s okay. At the end of the day, it’s a longterm relationship and it needs to be working for everyone. More than ever, people want a bank they can trust.
So how do you know if refinancing your home loan is worth the effort? Simply, you need to weigh up the savings gained verses the costs of making the move to another bank.
There are costs associated with refinancing your home loan – some banks have application and other fees to pay. And it’s important to note that it could take you one or two years to start seeing the savings generated by making the switch.
Other ways to pay off your home loan sooner
To pay off your home loan sooner, there are a few other things you should consider:
Moving to weekly or fortnightly repayments instead of just monthly. If you get any extra money—like a bonus or commission from your job — put it into your loan.
Talk to your bank about other ways you can make your money work better for you.
You may only make small savings over the short term, but over a 10 or 20 year period can really add up.