Skip to content

Five strategies to pay off your mortgage faster

Five strategies to pay off your mortgage faster

According to the Australian Bureau of Statistics, Australians spend more on housing costs than any other budget item, including food and drink. Imagine how much more money you’d have to spend on the things you value if you didn’t have a mortgage payment to meet every month.

With interest rates at rock bottom, there’s never been a better time to get your mortgage paid off. While rates may not rise for a while yet, they will do so eventually. If you can get ahead now, you’ll be buffered against the increase and can avoid mortgage stress. You may even make it to the ultimate goal: mortgage-free!

Here are five strategies to get your mortgage paid off faster.

1. Pay fortnightly not monthly

If you elect to pay your mortgage fortnightly, your lender will take your monthly payment and divide it in two. Sounds straightforward, right? But because there are 26 fortnights in a year, and only 12 months, you end up making two extra payments per year.

If your monthly repayments are $2,000, and you pay monthly, you pay $24,000 per year. Change that to $1,000 per fortnight and you’ll have paid $26,000. If you line your repayments up with your fortnightly salary, you won’t miss the extra — and yet, amazingly, you can shave off a couple of years from the life of your loan.

2. Shop around for the best deal

Right now, banks and other lenders are offering some of the best rates we’ve ever seen. For a residential principal and interest loan, if your rate is over 3% it’s probably worth looking around.

If you’re currently sitting on a 3.5% rate on a $500,000 loan your repayments are likely to be around $2,513 per month. Cut that down to 2.5% and you’ll be paying $2,253 instead.

Look at your home loan lender’s rates, and the rates offered by competitors. Talking to a broker is a great idea, as they’ll know where the best deals are and whether you’ll be a good candidate for refinancing.

Of course, to reduce the life of your home loan, don’t pocket the extra $250. Instead…

3. Increase your monthly repayments

Paying more than the required amount every month is another effective way to get the principal down faster. Even a couple of hundred dollars extra per month can take years off your loan.

If your interest rate has dropped since you first took out the loan, try and keep your repayments at the original higher rate. You’re less likely to miss the money, but you’ll be making it work for you, not your bank.

The ASIC MoneySmart calculator estimates that paying an extra $386 per month on top of a $2,315 monthly home loan repayment can shave six years off your loan. You can plug in your own figures here to see how much you can save.

4. Use an offset account

Offset accounts let you use the money in your transaction account to offset the interest on your home loan. Your loan interest is calculated on the amount owed on your home loan minus the amount in the linked offset account. Therefore, the more money you have in the offset account, the less interest you pay.

On a $500,000 loan at 3.67%, keeping $10,000 in your offset account can save you $19,400 in interest repayments and take a year off your loan. All without you having to pay a single extra dollar!

To make the most of your offset, try and keep as much of your money in there for as long as possible. That might include having your salary paid directly to that account, using it for long-term savings and using your credit card for everyday purchases – as long as you have a direct debit set up to pay it off in full at the end of every month.

Almost every lender offers an offset account option, although there may be fees and charges associated. Talk to your broker or lender about whether this option is right for you.

5. Put lump sums towards your home loan

It’s tax return time, and for most of us that means a little extra back from the tax office. The end of the financial year is also the most common time for bonuses to be paid.

If you’re serious about achieving that mortgage free status, divert all or most of that bonus to your loan. Lump sums can have a huge effect on your total home loan and how long it takes to pay it off.

Especially during the early years of your mortgage, your repayments go mainly towards the interest component of your loan. An additional lump sum will come straight off the principal, meaning that every single interest payment from then on will be reduced.

Let’s say you have a $500,000 loan on a 30 year loan basis at 3.5%. Your monthly repayments will be $2,255 per month. Over the term of the loan (assuming no interest rate rises) you’ll pay $811,880.

A bonus of $5,000 paid into the mortgage after one year can save you $8,712.89 in interest and take six months off your loan. Do that every year and you’ll quickly see your loan term reduce.

You can calculate the difference a lump sum makes here.

Depending on your circumstances, some of these strategies may feel more manageable than others. Remember, paying off a home loan is a marathon, not a sprint, so don’t put yourself under immense financial stress. Choose where to put your efforts, and don’t give up. The finish line is worth it.

Related articles from the view

Aug 22, 2019

5 Smart ways to spend your tax return

Thanks to the Coalition’s tax cuts, a record number of Australians have already lodged their tax return for 2018-19 and have a nice little lump sum burning a hole in their bank account. But what to spend it on? You could sock it into the savings account, but surely it’s your patriotic duty to spend…
Read more
  • General
Jul 4, 2019

From zero to home owner

Buying a house or a unit of your very own is high on the wish list for most adults, but it can also feel very daunting. From the moment your mind turns to real estate, there are a lot of steps to take to arrive at the moment you walk through your very own front…
Read more
  • General
  • Home Loans
  • Residential
  • Rural
Jul 18, 2018

Guide to Buying

We know the decision to buy can sometimes be complex and confusing, and that’s why we’ve done all the hard thinking for you. Buying a home can be a complicated process full of rules and regulations the average home buyer isn’t familiar with. We’ll do all the hard work for you, leaving you time to…
Read more
  • Guides
Mar 26, 2020

Help for home owners during COVID-19

These are troubling times. COVID-19 has already meant large scale changes to the way we live and work, with more to come. With social distancing and shutdown orders expanding across the country, a huge number of us are worried about our economic security. Many people have already lost their jobs, especially those who work in…
Read more
  • General
  • Home Loans
  • Residential
  • Rural
Jun 3, 2020

How to get a home loan in the age of COVID-19

With interest rates at rock bottom, home loans have never been so affordable. But has the COVID-19 pandemic made things harder for would-be borrowers? John Rolfe, head of Elders Home Loans, calls it a ‘moving beast’. “Lenders are definitely very wary. They’re trying to avoid risk in an environment that keeps changing, and every bank…
Read more
  • General
  • Home Loans
  • Residential
  • Rural