A property is likely the largest purchase you'll ever make, and for most, it requires taking out a mortgage. However, home loan repayments can quickly become a burden, consuming a significant portion of a household's budget. With loan terms often stretching over decades, it's easy to feel trapped.
Fortunately, there are many strategies you can implement to pay off your mortgage faster. Small adjustments to your financial habits may feel minor, but they can make a significant difference in the long term.
Here are 10 effective ways to reduce the lifespan of your home loan and reach mortgage freedom sooner.
1. Make extra repayments
Want to get ahead on your mortgage repayments? The simplest way to do so is by making extra payments.
While it may seem counterintuitive, paying more now means paying less in the long run.
Extra repayments go directly toward reducing your loan's principal balance, lowering the amount of interest you're charged. The less you owe, the more of your regular repayments will go toward the principal, accelerating your loan payoff.
Heads-up for fixed-rate borrowers: Most fixed rate home loans limit extra repayments, and exceeding these limits can trigger break fees. Check your lender's conditions before making additional payments.
Use our extra and lump sum calculator to estimate the impact of extra repayments on your loan.
2. Use an offset account
An offset account can provide similar benefits to making extra repayments without locking away your spare cash.
An offset account is like a savings account that's linked to your home loan. The funds in this account are 'offset' against the home loan's balance, meaning you only pay interest on the difference. For example, if you owe $500,000 on your mortgage but have $50,000 in an offset account, you'll be charged interest on $450,000.
Quick tip: Choose a 100% offset account if possible, as some accounts only offset a portion of the deposited amount.
3. Make repayments weekly or fortnightly instead of monthly
Switching to weekly or fortnightly repayments is a simple but effective strategy to pay off your home loan faster.
There are 26 fortnights in a year, and only 12 months, so making weekly or fortnightly payments results in the equivalent of 13 monthly payments each year.
This helps chip away at the principal faster, reducing your loan term and the overall interest paid.
4. Switch to a shorter loan term
Considering refinancing or signing onto a new mortgage? Opting for a shorter loan term, such as 20 years instead of 30, can help you pay off your loan much faster.
While your repayments will be higher with a shorter-term loan, the savings in total interest are significant.
For instance, a borrower with a $500,000 mortgage and an interest rate of 5% p.a. could save over $100,000 by choosing a 20-year term instead of a 30-year one.
5. Keep an eye on your mortgage refinancing options
If you're unhappy with your current mortgage - whether it's due to a higher interest rate or lack of certain features - you don't have to stick with it. Refinancing to a more competitive home loan could free up cash, which you could use to pay off your mortgage faster. You might even secure a cashback offer in the process.
By switching to a loan with a lower rate, fewer fees, or better features, you could shave years off your mortgage and save thousands in interest.
Beware of switching costs: Exit fees on your existing loan and establishment fees for a new loan may apply, so be sure to weigh the cost of refinancing against the potential savings.
6. Strategically split your home loan interest rate
Your home loan's interest rate is one of the biggest factors influencing your mortgage repayments. Reducing or stabilising your rate could help you free up funds for extra repayments.
Fixed and variable rates each have their advantages, but you can enjoy the benefits of both by splitting your home loan. With part of your loan on a variable rate and part on a fixed rate, you can protect yourself from rising rates while also taking advantage of lower rates - and make extra repayments when possible.
7. Make your first repayment at settlement
Typically, lenders require borrowers to make their first repayment a week, fortnight, or month after settlement. However, getting ahead early can save you a significant amount of interest over time.Making your first repayment on the very day your mortgage settles gives you a head start and helps reduce the life of your loan right from the outset.
8. Beware of the honeymoon phase
Many lenders offer attractive introductory or 'honeymoon' rates that revert to a higher rate after a set period.
If you're considering a loan with a honeymoon or special rate, pay close attention to the rate it reverts to after the discount period ends.
That rate could significantly increase your repayments and be much higher than the rates offered elsewhere.
9. Avoid interest only home loans
An interest only home loan might sound appealing due to its lower initial repayments. However, they can significantly slow down your progress toward owning your home outright.
When you take out an interest only mortgage, you're only required to pay interest on your borrowed funds for a set period (usually 1 to 5 years). While this can free up cash flow in the short term, you won't be reducing the principal balance - meaning you're not actually paying off your mortgage during this period.
Once the interest only phase ends, your repayments will increase as you start paying off both the interest and the principal, which can make it harder to manage your budget.
10. Don't reduce your repayments if interest rates fall
The key to paying off your mortgage faster is to never reduce your regular repayments, even when interest rates drop or you refinance. Instead, maintain or increase your repayment amount.
By consistently paying more than the minimum required, you'll reduce the principal faster and cut down the total interest paid over time.
Staying disciplined with your repayments is crucial to shaving years off your mortgage and saving thousands in interest.
Article originally published by Nila Sweeney in 2021. Last updated by Brooke Cooper in October 2024.
Image by Lesly Juarez on Unsplash
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