The average monthly mortgage in Australia is $636,597 [1] and after multiple interest rate increases, many households are feeling the pinch with their monthly repayments.
Fortunately, there are a few things you can do to ease the pressure and edge closer towards a debt-free life.
Here we explain how you can pay off your mortgage faster with our top tips and tweaks.
Why Should You Pay Off Your Mortgage Faster?
- Financial freedom and security
- Interest savings
- Building equity faster
- Reducing financial risk
- Peace of mind
The longer you have a mortgage, the more interest you will pay.
Being mortgage free can reduce stress and give you financial flexibility. If your mortgage repayments are currently using up the majority of your funds, then you’ll be able to live a little more freely once that obligation goes away.
If you’re at the beginning of your home loan term, it is wise to pay down your mortgage as much as possible to reduce the amount of interest you pay overall.
Easier said than done, right?
Strategies to Pay Off Your Mortgage Faster in Australia
1. Utilising Offset Account(s)
An offset account is an account linked to your variable home loan account. It can function as a transaction account to hold your money, but with a key difference: money held in your offset account reduces the amount of interest you pay on your mortgage loan.
Money held in your offset account is “offset” against the balance of your loan. Here’s how it works:
Let’s say you have a $700,000 mortgage and $30,000 in your offset account.
Your interest is calculated on your home loan balance less the amount held in your offset: in this case, $670,000 as opposed to the full amount.
Your regular repayments remain the same, however a bigger amount goes towards paying off your mortgage principal instead of interest payments.
The money in your offset is immediately accessible to you to spend as you wish, though the higher the balance, the more you will benefit from interest savings.
Offset accounts can save you thousands over the life of your loan and potentially shorten the loan term.
2. Changing Payment Frequency to Weekly or Fortnightly
Switching from monthly repayments to weekly or fortnightly can save you a significant amount of money in the long run:
Interest is calculated on the remaining balance of your loan daily; the more regularly you make repayments, the lower that figure will be, significantly lowering your interest repayments over the life of your loan.
Another plus:
By making repayments every 2 weeks, you end up making 26 half payments each year, which equates to 13 full payments; one extra payment each year.
3. Increase Regular Payment Amount
Any increase in your regular repayment amount will help you pay down your mortgage faster.
You pay interest on the loan balance; the lower the balance, the lower the interest charged.
A simple way to do this could be to round up your payments. Let’s say your repayment is $2,475 per month; if you round that up to $2,500 you can chip away at the principal without feeling significant financial strain.
Over time, this small change can make a big difference and could lead to a faster payoff.
4. Making Extra Payments
Want to pay off your loan in 10 years? Less? The most effective way to pay off your mortgage debt is to make extra payments above your regular monthly payment.
Paying extra towards your principal is an easy way to reduce the time it takes to repay your loan and lessen the amount of interest you’ll pay; if your budget allows it.
Putting a small amount of cash aside to make even one extra repayment per year can go a long way.
Note: fixed rate home loans may only allow you to make an extra $20,000 in additional repayments during the fixed period. Variable accounts have no limits to extra mortgage payments, so have at it.
5. Shortening Loan Period From 30 Years
The shorter your loan term the less you’ll pay in interest.
With a reduced payment timeline, you will have less total debt over the life of your loan. This frees you up to put more of your money into savings, investments or towards other financial goals.
Let’s say you have a $700,000 principal and interest mortgage with an interest rate of 6.28% p.a. For a 30 year loan term, your monthly repayments would work out to be $4,323.69, the total payable interest would be $856,528 and your total payments would be $1,556,528.
Now let’s shorten the loan term to 25 years; your monthly repayments increase slightly to $4,630.68, however the total payable interest drops to $689,203 and your total payments would be $1,389,203.
Use this mortgage repayment calculator to see how much money shortening your loan period could save you in the long run.
6. Principal and Interest Loan Vs. Interest-Only Loan
If you have a principal and interest loan, your regular repayments go towards both paying down your loan balance and paying the bank’s interest charges.
Interest only loans see your monthly payments go entirely towards the bank’s interest charges. It can mean lower regular repayments, though none of your payments are going towards paying down your loan at all and will not help you pay off your loan any faster.
If you’re after ways to pay off your mortgage faster, principal and interest loans are the way to go (in most circumstances).
7. Moving to a Lower Interest Rate
You may be surprised at the variance in interest rates across different lenders!
Moving to a lower interest rate could save you thousands and shorten your loan term. By reducing monthly repayments, you can allocate more money to paying off the principal balance, or to free up cash for investments or other savings goals.
You could ask your current lender for a better rate, or you could consider refinancing. Shop around, compare interests rates and the total cost of the loan, as well as the difference between a variable and a fixed rate home loan. Use this calculator to see how much you could be saving on a lower interest rate.
What Happens When You Pay Off Your Mortgage Completely?
That depends on your lender!
Lenders have different conditions attached to their products; paying down your mortgage early may result in a repayment penalty. This payment could be equal to several months of the mortgage’s interest or a percentage of the original mortgage value. With Homestar Finance, we want to make your home ownership journey easy, and our variable home loan rate products are designed to help pay off your mortgage faster and do not have repayment penalties.
The benefits of being mortgage free? Interest savings, increased cash flow and financial security, just to name a few.
Freeing yourself from your mortgage debt can allow you to redirect your money towards other financial goals as well as lift a heavy burden off your shoulders.
This article is general in nature and does not take into account your financial situation. You should seek advice from an experienced financial advisor before making any commitment of a legal or financial nature.
[1] Australian Bureau of Statistics, 2024. Lending Indicators. https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release
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