How to Pay Off Your Mortgage Faster
Last updated on May 26th, 2022
The mortgage is one of the biggest – and longest – expenses for any Australian household. Most of the time, it takes decades to completely pay for a home. Paying off your mortgage early could save you a lot of money and take a massive financial load off your shoulders. Here are seven ways to pay off your home loan faster.
1. Switch from monthly to fortnightly payments.
Most people pay their mortgage debt in monthly instalments. If you are one of those who are currently paying monthly, you might want make your repayments to every fortnight or every two weeks.
Let’s say you are paying $2,000 for your mortgage every month. If you pay $1,000 every two weeks instead of $2,000 every month, you will be able to pay 26 times because there 26 fortnights per year.
2. Make extra payments on your mortgage.
You can cut your home loan by a number of years if you make extra repayments on top of your monthly payment. For example, you unexpectedly received a bonus or tax refund. You could put this into your mortgage instead of spending it and save you thousands of dollars in interest.
Let’s look at a typical 25-year principal and interest mortgage. During the first five to eight years of paying your home loan, most of your payments go towards paying the interest only. So, if you have extra money that you could add to your payments, it could reduce the amount of interest and cut those 25 years shorter.
Some banks charge a fee for making extra payments, so it is best to ask your lender about this.
3. Pay a lower interest rate.
Evaluate your current loan and choose the features that you want to keep. Then compare the interest rate on similar loans. If you find a lower interest rate somewhere else, ask your current lender to match it or offer you a lower rate.
Comparison websites are an excellent tool for comparing interest rates. But keep in mind that these are businesses, too, and one of the ways they make money is through promoted links. See if they cover all your options.
4. Switch loans.
If you find a lower interest rate from another lender, you might want to consider switching. However, lenders often charge a fee when you terminate a loan early, so make sure the benefits outweigh any fee you have to pay for ending your current loan and applying for a competitor.
5. Make higher repayments.
Another way to shorten your mortgage is to make higher repayments. Even if interest rates drop, keep paying the same higher rate of interest on your loan.
If you decide to switch to a loan with a lower interest rate, keep paying the same repayments you had at the higher rate to pay off your loan early.
6. Consider linking an offset account to your mortgage.
An offset account is a savings account connected to your home loan. The balance in your offset account reduces the amount remaining in your mortgage which, in turn, reduces the amount of interest you pay.
For example, if you have a $500,000 mortgage and an offset account with $20,000, you will only be charged interest on $480,000.
An offset account is only beneficial if you have a large deposit. For example, if your offset balance is always under $10,000, it may not be worth paying for this feature.
7. Don’t take out an interest-only loan.
The best way to pay your mortgage faster is to pay for both the principal and the interest.
Most home loans from Australian lenders are principal and interest loans. This means that the repayments you make reduce the principal and cover the interest for the period.
If you take out an interest-only loan, you only pay the interest during a certain period without reducing the principal. This way, you pay more interest while your debt stays the same.
