Bought a new home or own one already? That’s awesome! Home ownership is often regarded as one of the large milestones in life. However, with great rewards (a place to call home), comes great commitments. Monthly home loan repayments for the next 20-30 years are quite a commitment
Fret not, here are a few tips to help you pay off your home loan early.
1. Increase monthly payments
You can start by increasing your monthly payments. This means paying more than what is required on your monthly repayments. When you pay more, you’ll get to reduce your home loan amount earlier, and reduce your interest costs as well.
Or if you’ve gotten a lump sum of free cash from the lottery, or from your company’s bonus, you can consider making a lump sum deposit to your home loan, to continue saving on even more interest. However, do check if there are any penalties for early termination.
Here’s an example:
If you have an outstanding home loan of $80,000 for 25 years, and you make a one-time prepayment of 5% or 10%:
|Prepayment among (% of outstanding home loan)||$40,000 (5%)||$80,000 (10%)|
|Monthly home loan payment||$4,440||$4,210|
|Total interest saved over the remaining loan tenure||$30,150||$60,300|
Note: This figure is based on the assumption that home loan interest rate increases to 5% per annum, and remains at that level for the remaining loan tenure of 25 years. Terms and conditions of each home loan are different, please check with our consultants here if you need help.
2. Refinance your home loan
Refinancing your home loan in simple terms is getting a new home loan to pay for your old home loan, often with more favourable terms such as lower interest rates or shorter loan tenure.
Refinancing your loan can often help you cash, save on total interest costs with attractive interest rates, and pay off your loan earlier with shorter tenure. In other words, if you want to pay off your home loan earlier, you can try to shop for better home loan deals that can help reduce your monthly repayments, total interest costs and total amount needed, so you can proceed to pay off your home loan faster.
That’s why you should review your home loan periodically to see if you can save on interest by refinancing, especially if your lock-in period is over.
3. Shorten your home loan period
It goes without saying that the faster you pay off your home loan, the less interest you’ll have to pay. So, if you want to pay off your home loan early, you should shorten your home loan period.
This is because just like all interest rates, it will compound over time. The longer it has to compound, the more it will grow. Besides, if you shorten your home loan period, you’ll be able to pay them off faster, while also reducing the possibility of encountering high interest rates during your loan tenure.
All in all, while paying off your home loan early sounds like a great idea, you should always ensure that you have enough cash for your daily expenses and an emergency fund set aside. If you want to leverage your property to get the best value of your money, you can consider refinancing your home loan, instead of paying it off early.