6 tips on how to pay off your mortgage faster

Your home loan is one of the biggest and most important expenses you’ll ever have in life. Keeping up with repayments and interest rate fluctuations can be challenging. Still, the advantages far outweigh the disadvantages — for example, you have stability, security, equity, and a valuable asset that you could sell for a profit in future.

Of course, everyone with a home loan wants to reduce or pay off their home loan as soon as possible so that they can spend the money on other things, like renovations, new cars, holidays and so on. 

The question is how to pay off your mortgage faster!

You can take a few simple steps to minimise your mortgage repayment period. Read on.

#1. Increase your repayments — in value or frequency

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Increasing your repayments — even slightly — can make a big difference and pay your mortgage faster.

Every little bit you pay off your loan counts.  Make your home loan a focus. You could be mortgage-free a lot sooner by putting any extra income from bonuses, your side hustles, etc., into your home loan.

Example (based on Money Smart):

On a $600,000 loan over 30 years, at 4% interest, paying an extra $200 per month could save you over $57,000 over the term of the loan in three years and six months’ time.

Doing things such as paying weekly instead of monthly or paying a lump sum when you will all help. Interest on a home loan is calculated daily therefore making repayments more frequently may help reduce the interest you pay over the duration of the loan.

#2. Open an offset account

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Offset accounts enable your spare funds to reduce your home loan interest every day. Instead of a lump sum sitting in your bank account earning little or no interest, these funds are saving you interest at your current home loan interest rate. 

A word of warning: These types of accounts do require some financial discipline, so if you see “available funds” and get tempted to spend, reconsider this option!

The benefit of these accounts is that the funds help reduce your interest bill but are still available to you in an emergency. To implement this strategy, you need a loan that has this feature.

Example: 

Using the same example as above ($600,000 loan, 4% interest over 30 years), if you were to put $100,000 into an offset account five years into your loan after an unexpected windfall or inheritance, you could save over $136,000 in interest and three years and 10  months off your loan.

The added advantage of using offset accounts is that you do not earn interest on the money, you save interest. It’s highly likely that the interest you earn would be less than the interest you pay on a home loan. Therefore, as a net benefit, you are probably in front.

Example: 

If you had your $100,000 in a one-year term deposit earning 1.65% interest, you would earn $1,650 at maturity. If you earn $95,000 per year, you would pay 37% tax plus a 2% Medicare Levy on that income (or $643.50), making the net benefit of the term deposit $1,006.50 over the year. 

However, if you put that in your offset account, using the same loan example above, you would save yourself over $4000 in interest in the first year.

#3. Re-negotiate your home loan interest rate

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It may sound too good to be true, but often a phone call to your bank with a veiled threat to leave can often result in a reduction of your current home loan interest rate.

Example:

Even a drop of 0.2% (4% to 3.8%) over 25 years on a $600,000 mortgage can save you almost $20,000 over the term of your loan.

So, get on the phone and call your bank. See what you can negotiate. You should really do this every year to make sure you are getting the best deal you can from your bank.

#4. Look for ways to cut back and save

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If you are really wondering how to pay off your mortgage faster, you will need to be realistic about your spending and saving. It’s tough but fair — you will need to cut back on unnecessary costs and make changes you can live with for the next five years (at least). 

Make a spreadsheet of your weekly spending and determine what can be cut from the budget. Once you’ve calculated how much you can save, arrange to have that amount paid regularly and automatically into your mortgage account. Even cutting one cup of cafe coffee each workday can save up to $1,000 a year!

Always keep an eye out for new opportunities, including better deals on essentials such as groceries, petrol and electricity. 

#5. Consider accepting renters to help pay your mortgage faster

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If you have the space and are comfortable living with other people, consider renting out your spare room to another person. You might choose a friend, a local/overseas uni student, or another like-minded person who needs somewhere to stay, even for a short period of time — they can help take the pressure off your monthly mortgage repayments and allow you to pay your mortgage faster.

Alternatively, accommodation services like airbnb.com.au can help with short-term lets. You might need to get permission from your local council, and if you’re living in an apartment, you will have to check the rules with the corporate body. If all goes well, you could meet some interesting people as you slash years off your home loan. 

#6. Get professional advice on how to get mortgage-free faster 

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Shopping around and comparing dozens of home loans is not as simple or easy as looking at the rate. To pay your mortgage faster, looking for a home loan package with the features you need that suits your circumstances is important. 

Good advice will help do this for you, saving you time, money, and stress and reassuring you that you have what you need.

At Elliot Watson Financial Planning, we can help you achieve more with all your financial needs, get in contact for comprehensive financial advice. We work closely with a mortgage specialist to help ensure that your money works for you. 

Contact us to book a consultation and discuss how to get mortgage-free faster ASAP.

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The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness, regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.
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