Paying off your mortgage sooner saves you money in interest and provides financial freedom and peace of mind. Here are six strategies to help you get ahead and pay off your mortgage faster.
Let’s Get Straight to the Point
Paying off your mortgage faster can save you money and reduce financial stress. Here are six ways to do it:
- Switch to fortnightly payments – make an extra payment each year.
- Make extra repayments – add extra cash to your loan to reduce interest.
- Find a lower interest rate – compare loans and ask your lender for a better deal.
- Increase your regular repayments – pay more than the minimum to reduce the loan term.
- Use an offset account – reduce the interest by linking a savings account to your mortgage.
- Avoid interest-only loans – pay both the principal and interest to reduce debt faster.
Always check fees and consult a professional before making changes.
Switch to Fortnightly Repayments
1. How Fortnightly Payments Work
Switching to fortnightly repayments could make a significant difference if you pay monthly.
By paying half of your monthly amount every two weeks, you’ll make 26 fortnightly payments a year instead of 12 monthly payments.
This makes the equivalent of an extra month’s repayment each year.
2. Benefits of Fortnightly Payments
This simple adjustment can cut down the life of your loan and significantly reduce the interest you pay. You minimise the total interest over time by chipping away at the principal more frequently.
Make Extra Repayments
1. The Power of Extra Payments
Making extra repayments on your mortgage can help you pay it off years earlier. Most payments go towards paying off interest during the initial years of a typical 25-year principal and interest mortgage.
By making additional payments, especially early on, you reduce the principal quicker, lowering the interest payable.
2. Ways to Make Extra Payments
You can use windfalls such as tax refunds, bonuses, or even a portion of your savings to make lump-sum payments. These extra contributions can compound, reducing the overall interest and shortening the loan’s term.
3. Check for Fees
Before making extra payments, check with your lender if any fees are associated with additional repayments. Some loans, particularly fixed-rate ones, may charge penalties for early payments, so it’s best to confirm.
Shop Around for a Lower Interest Rate
1. Comparing Interest Rates
One of the easiest ways to reduce your mortgage is by finding a lower interest rate. Review your current loan terms and identify the features you want to retain.
Then, compare similar loans from various lenders. If you find a better rate, approach your existing lender to see if they can match it or offer a more competitive rate.
2. Beware of Comparison Websites
While comparison websites can be helpful, remember that they may not cover all available options and often promote links from which they earn money.
Conduct thorough research before relying solely on these sites.
3. Switching Loans: Weighing the Costs
If you decide to switch to another lender, calculate whether the benefits of the new loan outweigh the costs of closing your current mortgage and applying for another.
Consider exit fees, application fees, and other costs associated with refinancing.
Increase Your Regular Repayments
1. Paying More Each Month
Another effective way to get ahead on your mortgage is to make higher regular repayments.
For example, if you have a loan at a lower interest rate, continue paying as if the rate were higher. This extra contribution directly reduces the principal, helping you repay the loan sooner.
2. Adapting to Interest Rate Changes
While this strategy might be challenging during rising interest rates, it becomes beneficial when rates drop.
If you secure a loan with a lower rate, resist the temptation to reduce your repayments. Instead, continue paying the higher amount to expedite the loan repayment process.
Consider an Offset Account
1. What Is an Offset Account?
An offset account is a transaction or savings account linked to your mortgage. The balance in this account reduces the amount on which interest is calculated.
For instance, if you have a $500,000 mortgage and $20,000 in an offset account, you’re only charged interest on $480,000.
2. Maximising the Benefits
A substantial and consistent balance in the offset account can significantly reduce your interest and shorten the loan term.
However, if your offset balance is typically low (e.g., under $10,000), the benefits might not justify the potential fees for maintaining this feature.
Avoid Interest-Only Loans
1. Why Interest-Only Loans May Not Be Ideal
Interest-only loans require you to pay just the interest on the borrowed amount for a set period (typically five years) without reducing the principal.
This means that while you’re only covering interest costs, your actual debt remains unchanged, resulting in a higher total interest cost over time.
2. Opt for Principal and Interest Loans
Principal and interest loans are generally the best way to ensure you’re actively paying down your debt.
With each repayment, you cover the interest and gradually reduce the amount you owe. This approach helps you build equity in your property and accelerates the loan payoff process.
Conclusion
Paying off your mortgage faster can significantly relieve your financial burden and allow you to achieve other financial goals sooner.
By implementing one or more of these strategies—switching to fortnightly payments, making extra repayments, finding a lower interest rate, making higher repayments, using an offset account, or avoiding interest-only loans—you can substantially impact the life of your loan.
Consider your financial situation and speak with a mortgage professional before changing your repayment strategy. The right approach can save you thousands of dollars and help you gain financial independence more quickly.
Frequently Asked Questions
1. Can I pay off my mortgage early without penalties?
It depends on your loan terms. Some lenders charge fees for extra repayments, especially on fixed-rate loans. Always check with your lender before making additional payments.
2. How much can I save by switching to fortnightly payments?
Switching to fortnightly payments can save you thousands in interest and cut your loan term by several years. This is because you make the equivalent of 13 monthly payments in a year instead of 12.
3. Is it worth using an offset account?
Yes, if you keep a consistent balance in your offset account. The more money you have in the offset, the less interest you’ll pay on your mortgage.
4. When is refinancing to a lower interest rate a good idea?
Refinancing is beneficial if the savings from the lower interest rate outweigh the costs of switching loans. Before deciding, compare fees, new interest rates, and the overall impact on your repayment term.
5. Should I choose an interest-only loan to reduce monthly payments?
Interest-only loans temporarily lower monthly payments but don’t reduce the principal. For long-term savings and quicker payoff, it may be better to opt for a principal and interest loan.
