Paying off your mortgage early can save you thousands in interest and give you financial freedom sooner. For most people, their mortgage is their biggest debt, so paying it off early can have a big impact on their finances. Even small changes can make a big difference. Here are some ways to reduce your loan term and costs.
1. Use an Offset Account
An offset account is a type of bank account linked to your home loan, reducing the interest you pay. For example, if you have a $500,000 loan and $50,000 in an offset account, your interest is calculated on $450,000 instead of $500,000, reducing the home loan balance used to calculate interest.
Many lenders offer 100% offset accounts on both fixed and variable loans, so you can save without losing access to your money.
2. Make Higher Repayments
Making an extra payment on your mortgage reduces the principal, so you pay less interest over time. Extra payments directly reduce the loan principal, so you pay less interest. Even small extra payments can make a big impact:
On a $500,000 loan with a 6.09% interest rate, paying just $100 more per month could shave 2 years and 6 months off your loan.
Increasing that to $100 per fortnight could reduce your loan term by 4 years and 7 months.
3. Make Lump Sum Payments
If you get a bonus, inheritance, tax refunds, work bonuses or other windfall, consider putting it towards your mortgage.
A $50,000 lump sum payment in year 15 of a 30-year loan could save $48,064 in interest and cut 3 years off your loan.
4. Use a Redraw Facility
A redraw facility allows you to make extra repayments and keep access to those funds if needed. You won’t earn interest on extra repayments but they reduce the interest charged on your loan. Making extra payments into your redraw facility reduces the home loan balance and the amount of interest you pay, but always check the fine print for any redraw fees or restrictions.
For example:
If you have a $300,000 loan and pay an extra $500 per month for 6 months, you could redraw $1,000 if needed.
This flexibility can help with unexpected expenses while still reducing your loan balance over time.
5. Switch to Fortnightly Payments
Instead of making monthly repayments, consider paying half your monthly amount every two weeks. Since there are 26 fortnights in a year, this means an extra month’s worth of repayments annually, so you can reduce your loan term. More frequent repayments, such as weekly or fortnightly, can help you pay off your mortgage faster and save on interest.
6. Find a Lower Interest Rate
Get a lower interest rate and reduce your repayments and free up money to pay down your loan faster. Compare your current lender with other lenders to see if you can get a better deal and remember refinancing your current loan can save you thousands.
A $500,000 loan at 6.09% interest requires monthly repayments of $3,027.
Lowering the rate to 5.59% would reduce payments by $159 per month, which could be used for extra repayments to shorten your loan term.
Regularly review your mortgage and refinance to a lower interest rate and save thousands. Even a small rate reduction can cut your repayment period.
7. Consolidate Your Debt
If you have other debts with higher interest rates, consolidate them into your home loan (if possible) and reduce overall interest costs and free up more money for extra mortgage repayments. Check for other fees that may apply when consolidating debts into your home loan.
8. Avoid Interest-Only Loans
Interest-only loans don’t reduce the principal, so you’ll pay more in the long run. Interest-only loans mean you pay more interest over time because the principal loan amount doesn’t decrease. Opt for principal and interest repayments so you’re actively paying down your loan.
9. Pay Cash for Renovations
If you’re doing renovations, try to pay in cash instead of adding to your mortgage. Using extra cash for renovations instead of adding to your mortgage means you won’t pay interest on those expenses.
10. Live on One Income (If Possible)
If you’re a dual-income household, budget as if you only had one income and use the second income to make extra repayments. This can help you become mortgage-free sooner and free up extra cash for other financial goals.
11. Make Your First Repayment at Settlement
Instead of waiting for your first scheduled repayment, make an early payment at settlement and reduce your principal immediately, and the interest charged. Making your first repayment early reduces the principal loan and the amount of interest charged from the start.
12. Review Fees and Charges
Check your loan for unnecessary fees and charges. Remove these and free up money for extra repayments. Check the fine print for any other fees that might impact your savings.
Does Your Home Loan Need a Health Check?
A home loan review can help you find the best way to pay off your mortgage faster. Talk to a Collective financial adviser to align your mortgage strategy with your overall financial goals. If you’re interested in investing, you might consider using your home equity for an investment property after paying off your mortgage.
Our lending specialist will review your financial situation and goals to find savings opportunities. Speak with your financial planner about booking a meeting with Sharon Fowler to learn more about our lending services
By making smart financial decisions and following these tips, you can save thousands, become mortgage-free, and have extra cash to invest or save for the future!
