The art of the possible: how to pay off your mortgage sooner
It’s a simple equation. Paying down your mortgage sooner can save you thousands of dollars in interest in the long run. Here are some ways to make the most of every dollar while paying off your loan quicker.
Increase your repayments…
Let’s take a look at repaying a $500,000 home loan, using the mortgage calculator available on the Australian Government’s MoneySmart website.
If such a loan was taken at a fixed rate of 5% and paid back at $2700 a month along with $10 in monthly fees, it would take one month shy of the Australian average of 30 years to pay off. And almost half of your repayments would be in interest, not in paying back the principal.
But if you increased those monthly repayments to $2900 – around $50 extra a week – you’d pay that same loan off in 25 years and 7 months, and save almost $80,000 in interest in the process.
… or keep up repayments when interest rates drop
The latest cut has seen the average variable home loan rate drop to 3.65%. This means an owner-occupier paying principal and interest on a $400,000 loan could find their repayments dropping by about $57 each month.
Rather than spending that money on something else, you could also use this low-rate environment as a chance to pay your loan off faster than previously possible. You’ll be saving on interest in the long-term, and potentially cutting down the life of your loan. One simple step is to ask your lender to keep your repayments at the same levels as before the rate cut.
Keep an eye on your options
Lower repayments could be the result of your lender passing a rate cut on. But sometimes the biggest home loan savings come from shopping around, finding the lowest rate available, and negotiating with lenders.
Depending on market conditions, refinancing your mortgage could reduce your interest rate. Having an annual ‘mortgage health check’ with your broker is a good way to know if your current mortgage is still right for you, or if there are alternative options available.
“Having an annual ‘mortgage health check’ with your broker is a good way to know if your current mortgage is still right for you, or if there are alternative options available.”
Use a redraw or offset account
If you want to make extra repayments, but keep your savings available to use when you need, there are two options available.
Redraw is available on most variable rate loans, and if you make extra repayments but need some extra money – let’s say to cover the cost of car repairs – you can ‘redraw,’ or withdraw, those extra repayments to use*.
Offset accounts allow you to accrue savings you can access at any time. But the big difference between this and a standard savings account lies in the fact that the balance of this type of account is “offset” each day against the value of your loan. And when your lender calculates your repayments, the amount in your offset account is taken off the principal or balance owing – meaning you pay less in interest.
For example, if you owe $300,000 on your loan and have $50,000 in your offset account, interest is only calculated on $250,000 of that balance.
Throw in a little extra when you can
Been given a financial gift? Got a little more back than you expected in your tax return? When life throws you a windfall, it can seem like an opportunity to treat yourself. But it can also be a good time to put a little extra back into the mortgage.
Likewise, if you receive a raise at work or your partner goes back into the workforce after a break, this could also be an opportunity to pay off some more of the mortgage. If you’ve managed without that income so far, it could pay to send it straight to your loan repayments.
Balance your budget
This sounds like a no-brainer, but reassessing your finances and seeing where you’re spending money that could otherwise go into repaying your mortgage can make a big difference.
Do you need to be subscribed to three different streaming services when one would do? It might be that you’re just spending more because you’ve lost visibility on your outgoings.
Whatever the case, we can all benefit from keeping a closer eye on where the money goes and finding ways to direct a little more of it into paying off that loan.
The key is making a plan, and sticking with it. A professional mortgage broker will work with you to understand your situation, determine the options available, and help you find the best solution.
*Check the conditions of your loan before you decide to redraw.
