While home loans have changed over the past few decades with the addition of a number of extra features, the concepts of repaying a mortgage faster remain the same.
In a nutshell, the concepts revolve around two strategies:
- Making extra repayments
- Paying the lowest amount of interest possible
Let’s look at these two in more detail.
Make Extra Repayments By Paying Your Mortgage Fortnightly
You may not need to change too much in order to make additional repayments.
Many loans are set up with a monthly repayment. But most people are paid fortnightly.
Lets say you have a loan with a monthly repayment of $5,000. Over twelve months, this is a total of $60,000 being paid in loan payments.
So currently, you’re spending $60,000 a year on loan repayments. This is around $2,308 per fortnight.
Now, if you halved the monthly repayment of $5,000 you get a fortnightly amount of $2,500.
Here’s where it gets interesting. There are 26 fortnights in the year.
Let’s assume instead of paying one repayment of $5,000 at the end of every month you begin to pay $2,500 every fortnight.
So 26 payments of $2,500 per fortnight total $65,000 over the course of a year. This is $5,000 more than the original option where you paid $60,000 per year.
So by converting to fortnightly repayments, you’re paying an extra $5,000 off your mortgage.
The maths behind this is simple – there are 26 fortnights in a year. A 31 day month isn’t exactly four weeks – it’s a bit more.
So by paying fortnightly, you’re making extra repayments.
Make Extra Repayments By Using An Offset Account
Another simple way to pay off your mortgage faster is to use an Offset Account.
An offset account is simple – any extra money you have invested in an Offset Account with your bank doesn’t earn any credit interest in the bank account. Instead, the amount you have in the account is offset against your loan balance. This reduces the balance of the loan that has interest charged against it.
Let’s assume you had a spare $10,000 and put it in an offset account for a year. This will reduce your loan balance by $10,000. Based on a loan interest rate of 5.5% pa, this $10,000 would reduce the interest you’re being charged by $550 for the full year.
This may not seem like much, but it makes a difference over the longer term.
Make Extra Repayments By Using A Credit Card For Your Purchases
This strategy was popular a few years ago, but many people found out the hard way it wasn’t suitable for them.
It still works well, providing you’re disciplined.
The concept is simple. You use your credit card for monthly expenses. Your card has an interest free period so it doesn’t need to be paid until the middle of the next month.
In the meantime, money you would have used to pay for these expenses is deposited to your loan or offset account where it reduces the interest paid on the loan. Once a month you withdraw this money and repay your credit card.
This works well as long as you’re disciplined and can repay the credit card each month. The second you can’t do this and start paying interest at credit card rates, the strategy falls over and becomes quite costly to you.
Paying The Lowest Rate Of Interest Possible
One of the things you can probably do straight away is refinance your loan so you’re paying a lower rate of interest. On a $300,000 home loan, the difference of 1% is $3,000 in interest each year. So it is worthwhile looking for a lower rate.
You can start with your existing financial institution to see what rates and loans they are offering.
Look at the broader market to see what other loans are available.
For our most recent home loan, we used a mortgage broker who had access to a wide range of lenders and loan products.
We eventually found a loan that had the features that we wanted, together with a low variable rate and the flexibility to redraw if we needed to.
Every couple of years, look around again.
The lending environment is very competitive and different lenders will be better at different times. Don’t assume that the mortgage you currently have is still the right one for you.
Don’t Over-Complicate Things
Of course there are other strategies you can use, but they’re all variations on the same theme – either pay extra off your loan or get a lower interest rate (or do both!).
The cool thing about home loans is that the interest rates are generally a lot more stable and consistent which makes it easier to calculate the impact of some of these changes.
You can easily find home loan calculators on the web that will show you the benefits of a lower interest rate or making extra repayments. You’ll be amazed at the difference that something as simple as fortnightly repayments will make over the term of your loan.
What’s your top tip on repaying your mortgage faster? Leave a comment below.