If you paid your loan off just one year earlier you could save over $11,000. Pay it off five years earlier and you could save close to $50,000. That is, assuming your home loan is the average Australian home loan size ($488,875) and you have an interest rate of 3.5%.
So, if you’d prefer to keep your money in your pocket rather than fattening up your bank’s margins, use these 11 tips to pay your mortgage off faster and save.
- Just pay more
The most effective way to pay off your loan faster is to increase your repayments. When the budget’s tight this is easier said than done, but if you keep the benefits of early mortgage settlement in the back of your mind and put any spare money towards your mortgage, you could pay it off much faster than you might think.
- Switch to bi-weekly payments
You can choose to repay your home loan in two ways – with monthly repayments or half-sized fortnightly repayments. If you want to pay your loan off faster you should always choose fortnightly, as you’ll end up repaying slightly more each year. That’s because there are usually 52 weeks in a year – which means 26 fortnightly repayments and 13 full-sized payments. If you go for the monthly option you’ll only make 12 full-sized repayments a year.
- Put lump sums into your mortgage
If you come into a windfall, whether it’s an inheritance, gift, or a bonus from work, you should consider putting it straight into your mortgage. While an overseas holiday or a new pair of shoes might be tempting, putting lump sums into your mortgage will help you decrease your principal faster and pay less interest.
- Refinance to a shorter term
If you’ve got a little extra cash in the budget consider shortening your loan term. This will mean your repayments will be higher but it’ll also mean paying far less interest over the life of the loan.
- Use a 100% offset account
An offset account is a savings account linked to your mortgage, where the principal of your loan is reduced by whatever amount is in the savings account, helping to reduce interest on your loan. It’s a great idea to set one of these up for your home loan, particularly if you’ve got a lump sum of cash leftover after a property purchase.
- Align loan repayments with your payday
Missing loan repayments and struggling to make ends meet can make paying your loan off challenging, and paying it off faster almost impossible. It’s in your best interest to make repayments easier, so if you can try to line up your payday with the day your mortgage repayment comes out of your account.
- Don’t lower repayments if interest rates fall
If interest rates fall many people take the chance to make lower repayments and free up extra cash for other things. Don’t make the same mistake – keep your repayments the same when rates are low and you’ll pay your loan off faster.
- If your income increases, increase your repayments
When most people get a pay rise the money simply disappears as they adjust to live a more expensive lifestyle in line with their extra funds. If you’re serious about paying your loan off faster, don’t wander into this pitfall – put the extra cash toward your mortgage and pay it off faster.
- Get rid of low deposit rates
If you bought your property with a low deposit (under 20%) and have since amassed at least 20% equity, now might be a good time to refinance. That’s because many lenders charge higher interest rates and even extra fees to low deposit borrowers. Once you refinance to a lower interest rate it should be possible to pay off your loan faster.
- Put cashback into your loan
If you refinance or sign up for a new loan with a lender in some cases they’ll give you cashback – a lump sum of cash to use however you’d like. If you don’t need it to cover renovations or purchasing costs put your cashback straight into your loan to get the monkey off your back earlier.
- Check your home loan every 12 months
When your situation changes so should your home loan. That’s why it is best practice to check that your loan is still suitable for you and that you’re getting the best deal possible at least once a year. This should be done with the help of an expert like a mortgage broker, asking the following questions:
- Is my interest rate at market levels? Can I get it any lower?
- Do I have the funds to increase my repayments and decrease my loan term?
- Are there any other home loan products that could help me reduce my costs and pay my loan off faster?
- Is my mortgage still suited to my circumstances? If not how should it change?
By checking that your home loan is still suitable you’ll make sure that you never pay more interest or fees than you have to, and that you can pay your loan off in the quickest timeframe possible.