5 tips to pay off your mortgage faster - ALK Financial Group Pty Ltd

Can you imagine living mortgage-free? For many homeowners, mortgage repayments represent a large part of their salary and many years of hard work, with the end not clearly in sight.

Whether your goal is to soon be mortgage-free or to reduce your mortgage to allow you renovate, invest or live more comfortably, there are things you can do to make this a reality. And it may be simpler than you think, with a few small changes you can make now.

Make more frequent repayments

The first tip is an obvious one – to make more frequent repayments towards your mortgage so that you can pay it off sooner. What may not be apparent though is that this can be easier to do than you may think.

If you are currently making monthly repayments, consider switching to fortnightly repayments. By doing so, you can end up making the equivalent of an extra month’s repayment every year, given that there are 26 fortnights in a year. Keep in mind though that this only works if the fortnightly repayment is half that of the monthly repayment, so it depends on how your loan payments have been calculated.

Jessica is currently making her mortgage repayments monthly and is interested in how much she’ll save by increasing her payments to fortnightly on her 25-year loan of $650,000.

Jessica’s currently monthly repayment is $4,080 including fees, if she was to increase her payments to $2,040 per fortnight she will shave just under 4 years off her home loan, repaying it in 21 years and 2 months. By increasing the frequency of her repayments, she will save $101,964 in interest over the life of the loan.

Interest paid over the life of the loan

Original home loan repayment: $4,080/month x 25 years (@ 5.7% p.a.) = $573,717

Revised home loan repayment: $2,040/fortnight x 21 years & 2 months (@ 5.7% p.a.) = $471,908*

*5.70% interest rate for the remainder of the loan and $10 monthly fees.
Source: ASIC MoneySmart mortgage calculator.

There are home loan repayment calculators online, such as on www.moneysmart.gov.au, that can help you crunch the numbers, as demonstrated above.

Increase your regular repayments

Another way to get ahead on your mortgage and work towards paying it off sooner is to pay a little extra each month or fortnight on top of your minimum repayment.

While this may be more challenging with higher interest rates at the moment, but rounding up your repayments or if you are able to find a lower interest rate paying your previous repayment amount will chip away at your principal repayment and reduce the interest you pay over the life of your loan.

Trevor decides to contribute an additional $386 per month on top of his $2,315 monthly home loan repayment, paying $2,701 each month. Over the course of 12 months, he pays $32,412, which is roughly equivalent to two additional months’ worth of payments each year.

This will shave six years off Trevor’s 25-year loan term as well as around $80,000 in interest.

Original home loan repayment: $27,780/yr. x 25 years (@ 4.9% p.a.) = $694,500

Revised home loan repayment: $32,412/yr. x 19 years (@ 4.9% p.a.) = $614,948

Source: ASIC MoneySmart mortgage calculator.

Make additional lump sum repayments

As with the previous tip, by making extra repayments you will reduce the interest you pay and shorten the life of your loan.

These repayments can come from obvious sources, such as your tax return or a bonus, or may come from even such small wins, such as selling an item online – however you are earning a bit of extra money. Do you have a birthday coming up and think there may be a monetary gift? Even making small extra repayments can help chip away at the loan.

Kate’s required monthly repayment amount is $2,485 on a $400,000 loan with a loan term of 25 years. Over the term of the loan, she’ll pay a total of $29,820 in one year ($2,485 x 12), and over 25 years, Kate will pay $745,500.

Five years into the loan, Kate receives an inheritance of $70,000. Dividing the money, she puts $40,000 into her home loan and $30,000 into her bank account.

Making the lump sum repayment of $40,000 means that instead of paying off her loan after 25 years, she will reduce the loan term by more than three years – assuming her repayments remain the same – and save herself more than $70,000 in interest. The redraw balance will also gradually reduce in line with the loan term.ⁱ

Open an offset account

Opening an offset account – a savings or transaction bank account linked to your home loan – is worth considering in order to pay off your mortgage sooner. Interest is then charged on the difference between your home loan balance minus the amount you have in your linked offset account.

Once you have an offset account, you can get your salary paid into it directly so that there will always be money in the account, working to reduce the interest you pay.

Here is an example on what this can look like, based off these numbers:

Marco has a home loan of $350,000 and $50,000 in his offset account; in this situation, he’ll only be charged interest on a loan balance of $300,000 ($350,000 – $50,000).

Because the offset account acts like an everyday account, Marco’s $50,000 is still accessible whenever he needs it, even while it’s working to reduce his overall interest payments.

You will need to check with your lender as to whether your loan is eligible for an offset account, and if so, if 100% of the balance can be offset against the home loan.

Revisit your home loan

It may also be worthwhile revisiting your home loan and considering whether it’s still fit for its purpose. Read back over your loan’s terms as a starting point to refamiliarise yourself with them.

By considering your goal of paying off your loan sooner, you might see room for improvement, or the need to refinance or switch to a different lender. You might also find that you are paying for features you aren’t using – for example, if you do have an offset account but are not using it, you still might be paying an annual fee for it.

There are also small changes you can make, such as changing the loan type, or frequency of payments.

There’s no doubt that paying off your home loan does involve work, but by keeping these things in mind, you may be mortgage-free sooner than you think. So that we can support you to get there, contact us today to ensure you make the most of great rates and have a loan that suits your financial situation.

i https://www.commbank.com.au/articles/home-loans/pay-off-home-loan-faster.html

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