Anyone who has ever had a mortgage will tell you they would dearly love to pay it off before the length loan term is up. With some proactive strategies, you can slash your home loan term virtually in half.
Even still, most people continue to chip away at their loan on autopilot without giving much thought as to how they could pay off their mortgage more quickly.
For those who are keen to make some serious headway with their mortgage, with the goal of shaving a year or five (or more!) from their loan term, Australian Mortgage Options managing director, Robert Projeski, offers the following tips.
1. Align your mortgage repayments with your income
If you get paid fortnightly, make your mortgage payment fortnightly. "Doing this cuts down on interest payable and will save you a lot of money over the course of your home loan," he says.
2. Park lump sums in your mortgage account
Consider dumping any lump sum payment, such as a $2,000 tax refund, work bonus or dividends from other investments, in your mortgage. These large lump sums can cut years worth of interest off the loan term.
3. Increase your repayments while rates are stable
On Melbourne Cup Day, the RBA delivered a 0.25% rate cut to borrowers, and most lenders passed on the full cut. Use this to your advantage by keeping your mortgage repayments at the same level as what you were paying before the decrease. "You can cut up to two years off the life-span of your loan, simply by paying an extra $20 to $50 on each payment," Projeski says.
4. Offset your loans with a savings account
This is where the amount in your savings account earns interest (ideally at the same rate as your mortgage repayment, in a 100% offset), and that amount is subtracted from the interest payable on your loan. For example, if your loan is $400,000 and you have $100,000 in savings, you only pay mortgage interest on $300,000. It can greatly reduce the amount of interest you pay and also save years on your home loan term.
5. Have your wages paid into your offset
If you get paid $5,000 a month and those funds sit in your offset account for a few extra days per month, you could save a few hundred dollars in interest every year. It doesn’t sound like much, but it all adds up. "This can actually greatly reduce the interest that you pay, as the interest is debited at the end of the month and usually calculated daily," Projeski adds.
6. Perform a mortgage health check
You may find that your loan might not be the best fit for you any more. "Your loan may have been superseded as a product, or interest rates may have changed drastically, leaving you better off with a variable rate than a fixed one," he says. "In that case, look at re-financing whether it is with your existing lender or a different one."
This story was originally written in November 2011 and was updated for formatting and content in July 2018