Owning your own home is something that many Australians dream of. Although, the dream doesn’t include the many years spent paying off our mortgage. With long loan terms and fluctuating interest rates, it may seem like there is no end in sight for your mortgage repayments; and no chance to fund that long-awaited home renovation or holiday getaway.
Fortunately, we have several actionable tips that will help you pay off your mortgage early.
How to pay off your mortgage fast: An overview
There is no singular strategy for paying off your mortgage as fast as possible. Rather, there are several steps you can take that, when done together, can shave off a significant amount of your loan term. You may also try refinancing as a means of expediting the process as the loan market can provide new opportunities to save time and money at any point.
What you can start doing now:
How refinancing can help you pay off your mortgage faster:
Other things to keep in mind:
By choosing from the strategies below, you can find a mortgage plan that works best for you and your loan.
How to start paying off your mortgage faster now
If you are looking to start paying off your mortgage faster, there are options that you can pursue by communicating with your mortgage provider. Most providers will be open to you speeding up the mortgage repayment process and will work with you to make the necessary changes to your current loan agreement.
Make more frequent repayments
One of the easiest changes you can make to pay off your home loan balance faster is by making your mortgage repayments more frequent. If your current loan agreement involves you making monthly repayments, you can change these to fortnightly or weekly payments, shortening the amount of time spent making repayments altogether.
By doubling the payment frequency, you will be making the equivalent of an extra month’s repayment each year. This is because there are 26 fortnights in a year, while there are only 12 months in a year. More importantly, interest is calculated daily then charged monthly, so if the amount is reducing during the month the actual interest being charged will be less and you will be paying more of the principle off.
Increase your regular repayment amount
Adding a little bit extra to your regular repayment amount may not seem like a very bold strategy, but this simple method can go a long way to helping you reach the end of your home loan sooner.
Make extra repayments
Making extra repayments on your home loan can cut your loan term down by years. Any time you have a little bit of extra income, whether it is from a birthday present, a sale of unwanted goods, or a tax refund, placing it straight into your mortgage can help you pay off your home loan faster.
If this lump sum repayment method is not enough, you can make a plan to set up additional repayments on a monthly payment basis. Most lenders are open to this change in plans, but be sure to discuss your payment options with your current lender to ensure they do not charge any fees for these extra payments. See how quickly you can pay off your home loan with our extra repayment calculator.
Use an offset account
An offset account is essentially a savings or transaction account linked to your home loan that, much like a redraw facility, aims to reduce the total interest amount you will have to pay. This is because the account’s balance is offset against the mortgage’s total.
Offset accounts will regularly grow faster if you make lump sum payments into them. This could be a tax refund, monetary gifts, or even pay bonuses. Every dollar counts towards reducing your home loan balance.
Try the dollar-a-month plan
The dollar-a-month plan is particularly feasible to those whose income is likely to increase slightly but consistently as time progresses. That is because this strategy entails increasing your monthly or fortnightly repayments by $1 with each new payment.
For example, if your regular monthly mortgage payment is $800, then next month you will pay $801, the third month $802, and so on. While this does not seem like a massive increase in your repayment amount, sticking to this method over years can reduce the term of your mortgage significantly.
How you can pay off your mortgage early by refinancing
Although it is often easier to negotiate with your current lender to pay your mortgage off sooner, sometimes refinancing to a new loan and/or bank entirely is the best option for your finances. By refinancing your home loan, you can negotiate your home loan’s current terms, or seek out a new lender entirely that offers better interest rates and loan terms.
Find a lower interest rate
If you are happy with your existing home loan’s features but are looking to pay it off sooner, you can compare the interest rates to similar loans elsewhere; this applies to owner-occupied and investment property home loans alike. If you find a better rate, you can negotiate with your lender to match it or otherwise offer you a cheaper alternative.
Avoid interest-only loans
Commonly, a home loan is both a principal and interest loan, meaning that repayments will reduce the principal loan amount (the amount borrowed) and cover the interest for the period. However, an interest-only loan means that only the interest is paid off on the amount you borrowed, leaving the principal at its full amount.
Without a chance to pay off the loan principal, your debt will not be going down anytime soon, leaving you to pay more interest, and making the end repayments higher as you will still need to pay the principle loan amount. Avoiding interest-only repayments guarantees that you will not be caught in a cycle of debt and can continue paying off your home loan sooner.
Consider fixed vs variable rate loans
Both fixed and variable-rate home loans have their pros and cons, but one option may be better for you to utilise over the other. Variable rates are more flexible, allowing you to make extra payments on your mortgage without accruing any fees.
If you are currently with a fixed-rate home loan, you may want to consider refinancing to a variable loan. This may not even come with closing or break fees as you can wait until the end of your fixed loan term to make the switch. Try our loan comparison calculator to compare how you can save between different loan options.
Otherwise, you can split your loan between a variable and a fixed-rate home loan. You will have to consider any limits on your fixed loan about making extra payments, but if the loan market offers benefits for both, you can divide your loan up suitably.
Consider a non-big bank lender
It is not uncommon to take out a mortgage with a big bank. Their notoriety and success offer a sense of security to many, turning them away from smaller independent lenders. This is not necessarily true, however, as many small lenders offer just as much security as bigger names and often with a more beneficial home loan term.
Since non-bank lenders are privately owned and competitive within the market, they often have greater flexibility on what interest rates they can offer. These institutions are also less restrictive on financial criteria, offering a lower deposit rate for home loans. Refinancing with such a lender can offer you better conditions to pay off your home loan faster.
Other things to keep in mind when paying your mortgage off more quickly
When looking for methods to pay off your home loan faster, there are some considerations to keep in mind that will help you in your journey. They can be fairly simple daily tasks or more long-term financial decisions that can help you earn a bit more money to help you become mortgage free.
Create a budget and cut back on spending
This may seem like an obvious tip for saving money, but looking to make long-term financial changes requires making small sacrifices; including that daily cup of coffee from your favourite coffee shop.
Did you know that a $5 cup of coffee 5 days a week adds up to $1,300 per year? Or you can look at bringing your lunch from home more often, that will make a bigger difference with the average lunch spend being between $15 -$20 you could be looking at $3,900 and $5,200 per year.
Setting yourself a strict budget and looking for ways to cut back spending can help you save money fairly quickly. This cash flow can then be consolidated into one extra mortgage payment every month, cutting down the amount of time left on your home loan. But make sure the budget you set for yourself is realistic, if you do not give yourself room for a life you will never stick to it.
Only reduce your payments as a last resort
When variable interest rates fall, it can be your first instinct to start reducing your minimum repayment amount. However, staying strong with the same rate means you can pay off your home loan faster.
Consider renting out a room
If you have the space for a tenant in your house, you may want to consider renting out that spare room to help pay off your home loan. It does not necessarily have to be a long-term tenant; just a short stay can take off quite a bit from your mortgage. Furthermore, you can claim several expenses involved in the process, potentially leaving you with a tidy sum.
Opening your house to tenants may require permission from your local council, as well as the body corporate of your building if you live in an apartment. Despite these rules and restrictions, you may end up meeting someone who will not just help you pay interest on your home loan, but also someone who may become a good friend!
Think about investing
For those who have already paid off a significant amount of their home loan, you may want to consider investing to help pay off that last amount. This can be investing in another property or looking into shares, but it may come with a higher risk than simply paying extra on your regular home loan bill.
Regardless of how you start paying your home loan off faster, it is best to speak with a financial adviser about what options are available to you. With expert advice from Homestar Finance’s team of home loan specialists, you can find interest rates and repayment terms that suit your financial stability and plans.
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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