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Why pay more than your minimum home loan repayments?

By Lauren Leisk, Yahoo!7 Moneyhound Updated December 3, 2012, 9:00 am

Paying back your mortgage faster than scheduled can save you hundreds of thousands of dollars in interest.


About half of all Aussie borrowers are ahead on mortgage payments, according to a recent report.


Among the developed nations, this is a level only matched by Canada.


They are also habitually better at managing their mortgages, going as far as to make repayments ahead of schedule according to the Reserve Bank of Australia (RBA).


The RBA cited consumer caution and the spate of interest rate cuts as the key motivators driving borrowers to pay more than their minimum mortgage repayment. Most had continued paying down the same repayment amount, allowing them to squash their loan principal faster.


The RBA suggests that 15 per cent of borrowers ahead of their repayments have a mortgage buffer of two years or more. Around 45 per cent are ahead up to six months, 15 per cent between six months to a year and more than 40 per cent boast a buffer exceeding one year's repayments.


Related: How to your mortgage repayments back on track


Here are five reasons why you should join them and get ahead on your mortgage too:


1. Save on interest


The earlier you pay off your mortgage, the less interest you're subject to paying. Make your money work harder with higher repayments to reduce the principal of your loan. Simply use a home loan calculator to estimate how $30 a week, or $200 a month or more in repayments can save you big money and cut years off your mortgage.


2. It's a time of opportunity


Low interest rates mean you can continue paying what you normally would, or even more, instead of being tempted to reduce your minimum repayment amount. Not pocketing the extra cash results in accelerating the term of your loan.


3. Equity building


Equity is the difference between the current market value of your property and the total balance you still owe on the home loan. If you'd like to renovate your home, improve your lifestyle or buy another property, you can use the existing equity on your home to do it. Better yet, 100 per cent equity is a quicker route to a comfortable retirement.


Related: Cashback from your home. What is a home equity loan?


4. You get your freedom faster


The more frequently you pay, the less interest you will attract. Switching to fortnightly repayments from monthly repayments allows you to squash your mortgage faster, simply because you're paying more annually. That's 26 fortnight repayments per year, which works out to be 13 months worth of payments, not 12.


5. Reduce your tax


If you have extra cash and deposit it into a savings-style account, the taxman requires you to pay tax on any interest earned. Depositing the funds into your mortgage is a tax-free form of investment – it's viewed as paying down a debt.


Be mindful of your home loan's fine print and ensure that making higher or extra scheduled repayments are allowed. Some home loans (usually fixed-rate loans) charge a penalty fee for paying off the principal faster than agreed, so it's worth knowing where you stand.


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