So you’ve found the right home loan, prepared your application and been approved by a lender. Great! Now the question is: How can you go about paying off your mortgage in full as quickly as possible?
The reality is that most lenders want you to use the full loan term (usually 25 or 30 years) to pay off a home loan, as the longer you take to repay the more interest you pay. Some lenders even include fees and restrictions on repayments to disincentivise you from paying off your home loan faster.
The good news is that there are things you can do to speed up paying off your home loan and take control of your debt. Here’s what to consider.
How to pay off a mortgage faster in Australia
Want to cut down on your home loan interest and pay off your mortgage faster? Try these five tips:
1. Make extra repayments
An extra repayment is when you pay more than the minimum monthly repayment required by your lender. This not only reduces your loan principal faster, but also means you’ll end up paying less interest on your loan.
If you can afford it, paying off more than the minimum can shave years off the life of your loan and save you thousands of dollars in interest.
Keep in mind, though, that some lenders don’t allow extra repayments or charge fees for paying more than the minimum. If speeding up your home loan is a priority, look for a product that allows extra repayments.
2. Make fortnightly payments
Making fortnightly repayments is the equivalent of paying half of your monthly repayment every two weeks. There are two main benefits to paying fortnightly instead of monthly:
Firstly, paying fortnightly allows you to squeeze in the equivalent of one extra monthly repayment per year. For example, if your monthly repayments were $2,000, after a year you would have paid $24,000 (12 x $2,000). On the other hand, paying every two weeks would equal $26,000 (26 x $1,000) as there are 26 fortnights in a year.
Secondly, the more frequently you make mortgage repayments, the less you’ll pay in interest over the life of your loan. This is because interest is calculated daily, so reducing your total loan amount more frequently reduces the interest payable.
3. Use a 100% offset account
Some home loans come with a linked offset account, which allows you to reduce the amount of interest you pay on your loan by “offsetting” the total loan amount against the money in the account.
For example, if you borrow $400,000 from the bank but you have $80,000 on a linked 100% offset account, you will only pay interest on $320,000.
With less interest to pay, your total home loan amount will be reduced – meaning you’ll pay off your home loan faster even if you only continue to make minimum repayments.
4. Pay off a lump sum
If you’ve received a lump sum payment such as a tax return, work bonus, inheritance or dividend payments, consider diverting these funds to help pay off your loan faster and reduce the interest on your mortgage.
5. Switch home loans
Your home loan interest rate and fees can have a significant impact on how much you’ll end up paying over the life of your loan and how quickly you can pay it off. Although your home loan may have been competitive when you first took it out, lenders’ rates and fees change all the time – so it pays to stay up to date with the market.
A mortgage broker or a comparison website can help you find out what's available and whether it’s worth switching to a new lender. Also consider telling your current lender you’re planning to switch to a cheaper loan offered by a different lender, as they may be able to negotiate a lower rate to keep your business.