Pay Your Mortgage Off Sooner with A Few Simple Changes
How to accelerate your mortgage repayments
If you have a mortgage, you probably dream about the day that it is finally paid off, but how much effort do you actually put into getting it out of the way as soon as possible?
The thing is that the numbers involved in typical mortgages are so huge they can be hard to think about unless you are a math savant, but if you want to pay it off quicker, this is exactly what you need to do. It’s all about the small wins.
For most people, buying property will be the biggest purchase they ever make. With that said, there are a few things you can do to ease the financial load and have your debt paid off faster. A bit of extra effort here can save you literally THOUSANDS OF DOLLARS.
Increase your repayments
If you’re able to do it, increasing your repayments is the best way to reduce the length of your home loan. If this sounds like a possibility, the most efficient way to do this is to be as organised as possible. For example, set yourself an annual number. Say $5000. To pay off this extra per year requires an extra $192.30 per fortnight. If that amount works, then don’t pay over, don’t pay under. Just pay it. Just as important is to not over extend yourself. A small amount paid like clockwork will invariably be better than the occasional extra lump sum, and you wont feel it so much.
With that said, it’s important to consider your circumstances, and you should consult a finance specialist prior to making any extra repayments. Note that some fixed rate loans restrict how much you can pay in extra repayments, whilst variable interest rate home loans generally allow this to be done without restriction.
Switch from monthly to fortnightly repayments
Depending on the terms of your mortgage, switching from monthly to fortnightly repayments can be helpful in helping you pay off a bit extra, without making too much of a dent in your monthly budget. One calendar year is comprised of 26 fortnights, meaning if you choose to make repayments on a fortnightly basis you will essentially be making the equivalent of 13 monthly payments per year. That is 2 extra payments per year. For every 6 years, that is an extra year paid off.
To find out how many years you could shave off your home loan by switching to fortnightly repayments, input your loan details into the mortgage calculator on the Money Smart website.
People tend not to think about the long game. They think that a slight reduction in the interest reduction ‘only equals a few dollars difference a week’. The point is very easily missed that slight reductions over a long period of time end up making HUGE differences. Depending on the size of your mortgage, 0.2% interest difference can end up being many thousands of dollars less to pay off over the life of a typical mortgage.
There’s no shortage of lenders to choose from in Australia, which makes for a very competitive marketplace to shop around. Interest rates are constantly fluctuating, and by refinancing your home loan at a lower interest rate you could save thousands. This is generally a straightforward process, but you will want to consider the following points before you make the switch.
- Strengths and Weaknesses – everyone has different expectations of their lender, so you should consider what is important to you. For example, whilst some prefer the convenience of being able to speak with staff face to face in a physical bank, others may be willing to make do with a great online experience.
- Variable and Fixed Interest Rates – ensure you understand the difference between variable and fixed interest rates, as well as the rates/features offered by different lenders.
- Research Fees – your current lender may charge fees for early exit, make sure you have a clear understanding of these fees and the total cost of refinancing your loan. If you want to refinance with your current lender, they may be willing to waive some fees. You may wish to consult with your financial advisor to clarify any doubt and ensure you make a financially beneficial decision.
Run an offset account
By running an offset account, you will be reducing the amount of interest charged on your home loan. An offset account is simply a transactional account which is linked to your home loan, and the balance of this account will “offset” your home loan principal. If you have received a lump sum payment or an increase in salary, you should consider putting these funds into your offset account. Some offset accounts pay a lower interest rate than your loan, but in order to maximise the benefits you should look for an offset account which pays the same rate (100% offset).
Use the capital growth of an investment property to do the heavy lifting for you
One of the most common strategies Pillar uses to wipe off personal debt (non-investment debt like a home mortgage) quicker, is to use the capital growth achieved by a good investment property.
The leveraging of investment debt (particularly when tax incentives are strong such as with brand new properties), can dramatically reduce the amount of time it takes an average couple to pay off the home loan on their principal place of residency.
Whilst for many non-investors this sounds like a contradiction (‘…how can taking out more debt possibly reduce my home loan quicker?’), the strategy can be very powerful and has been used successfully by many investors.
Own your home sooner – schedule an appointment with Pillar Financial
Paying your mortgage off sooner isn’t as hard as you might think. The team at Pillar Financial have assisted countless clients in reducing the interest charged on their home loans whilst highlighting the most efficient ways to pay down their mortgage faster. If you seek to own your home outright in the shortest possible timeframe, please schedule a consultation today by calling us on 1300 730 309. We look forward to helping you.