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.