In Australia, most mortgages take 25 to 30 years to pay off. It’s a long financial commitment.
There are, however, ways to pay your home loan off faster. Not only will you own your home sooner, but paying off your mortgage early could save you tens of thousands of dollars.
Here’s how to do it.
Get a home loan with a low interest rate
The higher your interest rate, the more you’ll pay on your loan and the longer it may take to pay it off. That’s why it’s important to choose a loan at the lowest possible interest rate.
Shop around for a lender that offers a low rate. These days, borrowers have a choice between traditional banks, building societies, credit unions and online lenders. Online lenders, in particular, have become popular with Australian home buyers because many offer more competitive rates than some traditional lenders.
Choose a principal-and-interest loan over an interest-only loan
On an average 30-year mortgage, most of your payments in the first few years go towards paying off the loan’s interest.
With an interest-only loan, you’ll pay only the interest for the first one to five years and won’t make a dent in the principal loan amount until after this period.
To reduce your debt faster, choose a principal-and-interest loan that allows you to pay both interest and some of the principal debt from the get-go.
Make sure your home loan allows extra repayments
Most lenders offer fixed-rate and variable-rate home loans. A fixed-rate loan locks in your rate for a specific period (say, three years). The advantage is that your monthly premium won’t change even if interest rates increase. The disadvantage is you won’t have the option to increase monthly payments with any extra cash that becomes available.
Variable home loan rates are often influenced by the Reserve Bank of Australia’s official cash rate. When the RBA raises or lowers the cash rate, home loan rates often rise or fall as well, which can affect your budgeting. However, with a variable loan, your lender may allow you to increase your monthly repayments so you can pay off your loan sooner.
Switch from monthly to fortnightly repayments
An easy way to gain some traction on your mortgage is to split your monthly payment in half and pay every fortnight. By doing this, you essentially make one extra monthly repayment per year. That’s because there are 26 fortnights in a year which means you’re making 13 ‘monthly’ payments per year rather than 12. This trick can help you save thousands on your overall loan amount.
Consider refinancing every five years
Signing with a lender doesn’t mean you’re tied to them forever. You can, and should, keep an eye out for better rates on home loans. Yet, surprisingly 81% of Australian homeowners have never refinanced their mortgage. They could be missing out on huge savings.
We recommend discussing refinancing options with your lender every five years. If you’re a reliable client with a good track record, they may be open to adjusting your home loan rate. If not, the mortgage market is competitive. You may be able to find lower rates with another lender.
Spend less so you can save more
The tried-and-tested way to pay your mortgage off faster is to pay extra every month and plough any additional funds into your mortgage. Received a bonus, tax refund, or lump-sum payment? Put it towards your mortgage.
To free up money to add to your mortgage repayments, spend less and redirect the savings to your mortgage. Yes, it requires sacrifice, but the reward is the chance to have your home free and clear much earlier than expected.
Use an offset account to reduce your interest
An offset account is a transaction account linked to your mortgage. Any money in that account automatically offsets the interest on your home loan amount. So, if your mortgage is $300,000 and you have $30,000 in your savings, you only pay interest on $270,000. An offset account is a clever way to use savings to pay your home loan off faster.
Paying off your mortgage ahead of schedule is not impossible. Choosing the right lender can make all the difference. If you feel you aren’t getting the best deal and are considering refinancing, get in touch with us at Well Home Loans. With our low interest rates, you can own your home much sooner than you thought possible.
Want to refinance? Contact Well Home Loans on 1300 899 724 for more information or click here to start the refinancing process and get your personalised borrowing scenario in less than 2 minutes!