Ways to pay off your home loan faster
Making small changes now can have a significant impact on both the total amount you repay on your home loan and the time it takes to become mortgage-free. Discover the best strategies for paying off your mortgage quickly and efficiently to achieve financial freedom sooner
Whether you’ve recently secured a home loan or are well into your repayment journey, you might be looking for ways to pay it off faster. In this guide, we’ll explore smart strategies to reduce both interest costs and the time it takes to clear your mortgage.
Please keep in mind that the examples provided are for illustration purposes only. Actual results may vary based on fluctuations in interest rates and how consistently you make your repayments. If you’re interested in receiving a personalized calculation based on your unique circumstances, we encourage you to reach out to one of our trusted mortgage brokers located in Sydney.
Increase your repayment amount
Paying more than your required monthly amount is a smart strategy to reach homeownership sooner.
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EXAMPLE:
Meet Nick. He decides to supercharge his journey to own a home by adding an extra $386 each month to his regular $2,315 home loan payment. This brings his total monthly payment to $2,701. Over a year, Nick pays $32,412, which is roughly equal to making two extra months’ worth of payments annually.
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The results are impressive: by following this approach, Nick shortens his original 25-year loan term by six years and saves about $80,000 in interest.
Original home loan repayment calculation:
- $27,780 per year x 25 years (@ 4.9% p.a.) = $694,500
Revised home loan repayment calculation:
- $32,412 per year x 19 years (@ 4.9% p.a.) = $614,948
While it might not always be possible when interest rates are on the rise. If you can switch to a loan with a lower interest rate, keep making the same higher repayments you were making before and enjoy the benefits of paying your loan off sooner.
Set up a mortgage offset account
A mortgage offset account can be a powerful tool for paying off your home loan sooner. It allows you to offset or reduce the interest charged on your home loan by using your savings to pay down the principal loan amount.
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For example, let’s say you have a home loan balance of $150,000, and you deposit $20,000 into an offset account. By doing this, you effectively reduce the amount on which you’re paying interest. Instead of paying interest on the full $150,000, you’ll only pay interest on the reduced balance of $150,000 ($150,000 – $20,000).
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The key benefit here is that the more money you keep in your offset account, up to the balance of the loan itself, the greater the savings, and the quicker you can pay off your loan.
Avoid interest only Home Loans
Paying both the principal and interest is the best way to accelerate the repayment of your mortgage.
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Most home loans are structured as principal and interest loans. This means each payment you make serves a dual purpose: it reduces the principal amount (the initial borrowed sum) and covers the accrued interest for that period.
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In contrast, interest-only loans require you to pay only the interest on the borrowed amount for a set period, often around five years. During this time, the principal remains untouched.
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The crucial difference lies in the impact on your debt. With a principal and interest loan, your consistent payments actively reduce your debt, bringing you closer to financial freedom through homeownership.
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In an interest-only loan, however, your principal remains unchanged during the interest-only period. This means your debt doesn’t decrease, resulting in higher overall interest payments.
Switch to weekly or fortnightly payments
Changing your repayment cycle may not always be a straightforward task, but it can lead to making extra payments on your home loan. Consider switching to a weekly or fortnightly repayment schedule, whether it’s for your minimum or additional payments, as this can help you pay down your loan faster.Â
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EXAMPLE:
Let’s say your monthly repayments amount to $2,000, totalling $24,000 annually (excluding interest). Now, if you switch to making $1,000 payments every fortnight, you end up making $26,000 in repayments by the end of the year. The reason behind this increase is simple: there are 26 fortnights in a year.
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Here’s a little secret that banks usually don’t highlight: interest on your home loan is calculated on a daily basis but charged to you on a monthly schedule. What does this mean for you? Well, it means that the sooner you make a repayment, the sooner you stop paying interest on that specific amount.
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Let’s break it down: every day that you carry a balance on your home loan, interest is accumulating on that balance. When you make a repayment, even if it’s before your monthly due date, that amount immediately reduces the balance on which interest is calculated.
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In practical terms, this means that by making repayments early or more frequently, you can minimize the interest you pay over the life of your loan. This simple understanding can be a powerful tool in your quest to pay off your mortgage faster and save money in the long run.
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So, remember, the quicker you make your repayments, the quicker you start saving on interest and making progress towards your goal of becoming mortgage-free .
Refinance to a lower Interest rate
Having a higher interest rate can result in larger monthly repayments. However, when you find yourself paying less towards interest each month, you might discover an opportunity to increase the amount you allocate to paying down your principal.
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While the idea of refinancing to secure a lower interest rate might seem like a significant undertaking, it can potentially save you a substantial amount of money over the lifespan of your loan.
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The good news is, you may not even need to go through the refinancing process to access a lower interest rate. Sometimes, all it takes is a simple negotiation with your current lender, requesting them to match the interest rate they offer to new customers.
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If you’ve been a responsible borrower and maintained a solid repayment history, your lender is more likely to accommodate your request. In today’s competitive lending landscape, retaining existing customers is a priority for many lenders.
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So, don’t hesitate to explore the potential savings that come with lower interest rates, whether through refinancing or negotiating with your current lender. It’s a strategic move that can make a significant financial difference.
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Occasionally, your current bank may be unwilling to adjust their existing interest rate offer. In such instances, the Home Loans Hub mortgage brokers are here to help you secure a lower home loan rate.
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Our dedicated team of mortgage experts specializes in finding the best home loan solutions tailored to your needs. We work diligently to explore all available options, negotiate on your behalf, and secure competitive interest rates
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