Tony Xia is the director of The Mortgage Agency based in Sydney. He specialises in a holistic approach to home loans to help clients achieve the best possible outcome, based on their personal needs and financial goals.
The rule of thumb is that the faster you pay off your home loan, the less money you’ll spend in the long run. Plus, you’ll become a homeowner sooner! Of course, the most logical way to own your property faster is to pay more money than your monthly mortgage repayments. But it isn’t necessarily that simple. Most home loans require certain functions to be set up that allow for extra repayments, or else you may be charged an additional fee.
Luckily, there are various things you can do when structuring your home loan to make it easier to pay it all off quicker than first scheduled, saving you cash along the way.
So, here are five things to consider ticking off before taking out a home loan that could make your journey to homeownership shorter.
Put down a bigger deposit
While it will certainly take longer to save up a larger deposit, the bigger your deposit is, the smaller your repayments will be. More importantly, you’ll also pay less interest. If you have a larger deposit, for example, 20% or more, you will also be exempt from paying lenders’ mortgage insurance (LMI) – which can get costly.
When you take out a home loan, the lender assumes the risk of you defaulting on your mortgage; they can repossess your property in an attempt to recover the money owed to them. In some cases, the property’s value may have fallen below the purchase price, meaning that the lender will fall short and won’t be able to recover all the money that was lost.
LMI is therefore an insurance policy that lenders can use to cover the shortfall, should the borrower not be able to meet their obligations.
Most lenders see a 20% deposit as enough to cover those depreciation costs. So, if you can put down a deposit of 20% or more and avoid paying LMI, you can shave thousands of dollars off your home loan. As a result, this can take off weeks and months from your total term.
Try and achieve an LMI waiver
If you can’t afford a 20% or more deposit, you may still be eligible for an LMI waiver.
Certain professionals receive home loan benefits because they’re considered to be low-risk borrowers. For example, high income-earning individuals – such as doctors, lawyers and accountants – generally have a stable, above-average income, so they are less likely to default on their loans. Be sure to enquire with your mortgage broker about whether you qualify for this exemption.
Apply for a First Home Loan Deposit Scheme (FHLDS)
If this is your first time applying to buy property, you can apply for the First Home Loan Deposit Scheme offered by the Federal Government if you meet the following criteria:
- Are within the maximum loan size, and
- Are buying for residential purposes as an owner-occupier, not as an investment.
This scheme acts as a guarantor and absorbs the LMI costs on behalf of the borrower, enabling first home buyers to only have to pay a 5% deposit and no LMI. Therefore, you don’t need to take the time to save up a large deposit, you can take out the home loan sooner – and pay it off sooner, too.
Use your home equity as a deposit for your second home
If you’ve paid off more than 20% of your property’s current value, you can refinance that home loan to access the equity.
That equity can be used towards the deposit on your new home loan – and if it’s more than 20%, you can avoid paying LMI. This means you don’t have to spend time saving up for the initial hefty deposit.
Set up an offset account or redraw facility
These features can be attached to your home loan if you’ve structured your interest according to a variable rate. Your home loan may have both an offset account and a redraw facility to provide you with further flexibility, including depositing money into the loan at any time.
Once you have enough money in your offset account or redraw facility, you can use it to settle the balance of your home loan. This can save you a significant amount of time, and money on interest.
Key Takeaways For Owning Your Home Faster
Before taking out a home loan, it’s essential to do your research. Employing the services of a mortgage broker can be exponentially beneficial.
Becoming a homeowner faster doesn’t necessarily mean you have to pay off your mortgage in huge chunks of money. There are numerous strategies and features that a mortgage broker can advise you on that will help you achieve your goals more effectively.
