Simple ways to pay off your mortgage faster

Last month we talked about different types of home loans and how they work, this month lets discover the simple ways to pay off your mortgage faster and save thousands of dollars in interest.

1. Use lump sum payments

It is a very effective way to save on your mortgage interest costs if you have received a lump sum such as an annual bonus from work or inheritance from family. The best time to arrange lump sum payments for a fixed term loan is when the current term is about to expire to avoid early repayment penalties. However, whenever you have lump sum payments coming in, I suggest checking with your financial adviser first to get in touch with the lender(s) to see if there are any extra penalties and take it from there.

2. Increase your loan repayments above the required minimum repayments

Even a small increase in current loan repayments can make a big difference on the life interest costs of a loan. Refer to the example below – Loan amount $500,000, over total term 30 years say at a 7% interest rate, by increasing you payments to  $207 each month, the total term of the loan will reduce from 30 years to 25 years & save an interest cost of $137,376.

3. Pay fortnightly or weekly instead of monthly

Instead of making monthly repayments, switch to fortnightly or weekly repayments. As there is only 12 months in a year, increasing to 26 Fortnightly frequency a year means that instead of paying only 12 loan repayments you will make 26 repayments instead, which will result in less total terms and also save on interest costs.

4. Refinance to a lower interest rate

It pays to shop around on interest rates to see whether you could refinance to a lower rate or a better pricing package including cash contributions. Even a small reduction of an interest rate can save you thousands over the life of your loan. Just be sure to be fully aware of any potential fees associated with refinancing, such as exit fees from your current lender and solicitor fees to switch into a new lender etc.

Useful Tip – If you manage to reduce your interest rates, it may be tempting to reduce repayments. However, keeping them the same repayments if you can is going to have a huge impact on your ability to pay the loan off faster.

5. Consider an offset account

An offset account is a transaction account linked to your mortgage account. The balance in your account is offset against your mortgage balance, reducing the amount of interest you pay. For example, a $600,000 mortgage and $50,000 in your offset account, you’ll only pay interest on $550,000. This can save you thousands in interest over the total loan term.

6. Make small lifestyle changes

If you can’t afford to make extra repayments, especially in the rising interest rates environment, consider making lifestyle changes to reduce your expenses. This could include cutting back on takeaways or cancelling subscriptions you don’t use.

Each step does not matter how small or big, they are all contribution towards the big picture of repaying mortgage faster.

By following these simple tips, you can reduce your loan term and save thousands of dollars in interest, without sacrificing too much. Remember, the key is to be consistent and disciplined with your repayments.

As always, we are aware that every person’s situation or financial goals are different, and it is best to review your specific loan situation by contacting a qualified financial advisor.

Disclaimer: We recommend that you seek personalised professional advice from your trusted adviser before taking any action as each applicant’s situation can be vary, the above content is only general commentary.

Feel free to contact us to review your personal loan situation.