Buying a house will probably be the single most expensive investment that you will ever make, so it’s not surprising that mortgages often take decades to pay off.
But if you’re smart about your finances, you can pay off this debt sooner and give yourself room to prepare for your next big purchase or investment.
To help you out, we outline seven strategies that can help you pay off your home loan faster.
1. Choose a variable rate loan over a fixed rate loan
These two loan types have their own pros and cons, but you might opt for a variable rate if you want to pay off your mortgage faster.
Getting a variable rate home loan means that the interest rate on your regular repayments may change at any time, depending on the Reserve Bank of Australia.
The big advantage of variable rate loan products is that they give borrowers some flexibility to react based on current interest rates in order to save money and pay off their loans faster. For example, most lenders will allow you to make unlimited extra repayments at no cost.
By contrast, you’ll need to pay fixed amounts every month for if you get a fixed rate loan – and you can only roll it over to a variable rate and make extra repayments once the fixed term ends.
2. Make repayments every time you receive your salary
If you get your salary fortnightly, changing your repayment schedule to fortnightly as well will help you pay off your loan faster. You will barely notice that you’re paying more each year.
Say your monthly mortgage repayments are $2,200. Without accounting for interest, you’ll have repaid $26,400 by the end of the year. If you pay half or $1,100 a fortnight, you’ll have repaid $28,600. You can use a mortgage repayment calculator to forecast how much you can speed up the life of your loan.
“This is because there are 12 months in a year – and 26 fortnights,” says National Australia Bank. “Effectively you squeeze in an extra month of payments each year. Even more importantly, over the life of your loan, this can shave a couple of years off.”
3. Make extra repayments
Check whether your current loan product allows you to make extra repayments. In other words, increase the amount that you pay every month.
Alternatively, you can make lump sum payments if your lender allows it. And if you’ve recently received a work bonus, inheritance, or tax return, consider diverting some of these funds towards your loan.
According to data modelling by AMP Bank, home owners can save a substantial amount in interest and pay off their mortgage much faster.
Based on the model, paying an extra $50 per month for a $300,000 home loan can save borrowers up to $44,150 in interest and pay off the loan five years earlier. Similarly, $50 will allow customers with a $400,000 loan to save $46,992 in interest and finish paying the mortgage faster by four years.
However, you should note that extra payments are not considered advanced payments. Talk to your lender or mortgage broker if you plan on taking a repayment holiday in the future.
4. Find a loan product with a lower interest rate
Know that you are not stuck with your chosen mortgage product forever. You have the option to refinance or switch your loan to get a better rate and pay off your mortgage faster.
Determine the features of your current loan that you want to keep and use loan comparison tools to find similar products.
If you find a better one, you can talk to your mortgage broker to match it or provide a cheaper alternative.
However, make sure that you crunch the numbers before refinancing your mortgage. This will come with a new set of costs which may include discharge fees, application fees, lenders mortgage insurance, and ongoing fees.
The bottom line is that the benefits must outweigh the costs of closing your current loan and getting another.
5. Get a principal and interest loan
Most home mortgage products in Australia are principal and interest loans. This means that regular repayments cover both the interest for each period and a portion of the principal.
As for interest only loans, you only pay the interest on the amount you’ve borrowed for a fixed period. They usually have a term of 30 years like standard home loans, but they provide the option to pay just the interest for the first five years.
Getting an interest only loan may seem attractive because it requires low initial repayments, but note that your principal does not reduce during this period. As such, you’ll spend more money on interest and pay substantially more for the next 25 years.
6. Run a home loan offset account
Having an offset account is a savvy way to utilize your savings better for mortgage repayments than putting it in a separate account. Basically, it is a high interest savings or transaction account attached to your mortgage.
Let’s say you have a loan of $400,000 and a 100% offset account with $50,000 in it. This means that the interest you pay will be based on a loan of only $350,000.
In other words, the interest in your offset savings account helps you cover your mortgage’s monthly interest cost and help you pay off your loan sooner.
Moreover, an offset account can function like a normal savings account that you can conveniently access should you need extra money – though this will reduce its potential to earn interest.
7. Consider splitting your home loan
Splitting your loan may require additional research and effort, but it will let you enjoy the benefits of a fixed rate and variable rate loan. This allows you to hedge your bets based on interest rate fluctuations and potentially pay off your mortgage faster.
For example, you can split your $400,000 home loan into multiple parts. If you decide to have a 50:50 split, a fixed rate will be charged on $200,000 and the other $200,000 will be subjected to a variable rate.
The fixed half will be protected from surges in interest rates, but you wouldn’t benefit if rates drop. Nonetheless, you can enjoy the certainty of knowing the amount of your next repayment for half of your loan.
At the same time, the portion under a variable rate scheme lets you use convenient features such as making unlimited repayments and setting up an offset account.
A split loan calculator can help you decide whether splitting is advantageous for you. Additionally, you can estimate repayment amounts over the life of the loan based on you how you’re going to split your mortgage.