9 ways to pay off your home loan faster
Owning your home and being mortgage free is the dream for most Australians. If you’re anything like me, your monthly finance goal is to have enough money in the bank when your next mortgage repayment is due.
To reach that magical moment of being home loan debt free, you have to do one of two things, make your minimum repayments for the duration of the loan term (usually 30 years), or pay extra money into the loan. There is no magic bullet for paying down your mortgage faster, other than making extra repayments. However, there are a number of strategies you can use to do this.
Here is a list of 9 strategies you can use to pay down your mortgage early:
1. Refinance your current loan
Variable interest rates fluctuate over the life of the loan, so if there are lenders offering loan products with a better interest rate than your current lender, it might be worth making the switch. While that is a wise decision, it’s not the complete answer.
When you refinance, you should either reduce the length of the term, forcing you to pay more into your loan, or at least match the loan term remaining and maintain your current repayment amount. For example, if you have 20 years left on your current loan at a rate of 3.9% and you’re paying $2,000 per month; when you refinance to a new loan product with a 3.2% variable interest rate, make sure the loan term is no more than 20 years, and continue to repay at least $2,000 per month.
2. Increase your repayment frequency
If you currently pay $2,000 per month, consider changing to fortnightly repayments of $1,000. At $2,000 per month, you’ll repay $24,000 per year, but at $1,000 per fortnight, you’ll repay $26,000. You will have made an extra monthly repayment after 12 months and barely noticed any change to your budget.
3. Is your loan structure right?
Do you have an offset account? Do you even need an offset account and the annual fee that comes with it? Do you have a redraw facility? Are you paying ongoing monthly or annual fees that you don’t have to with another lender? Your loan structure can be costing you a lot of money that you don’t need to be paying, or holding you back from making additional repayments. Speak with a mortgage broker and make sure you loan is set up the right way.
4. Get an annual home loan health check
Banks are sneaky, and they love it when you ‘set and forget’. They will slowly increase your interest rate so that you hardly notice it, while offering amazing interest rates to new customers. Every 12 months, you and your mortgage broker should discuss your current loan structure and interest rates, and make changes if it is to your benefit. If you used a mortgage broker and haven’t heard from them in a couple of years, it might be time to find a new mortgage broker.
5. Round up
Let’s say you’re paying $1,875 per month. How much of a stretch to the budget would it be if you paid $2,000? Or $2,100? Try it for a few months and see how comfortable it is. The reality is we tend to spend what is available to us. So if our money is in our loan, we may not spend it on other stuff we don’t need. And if you have a redraw facility, you can take it out at a later date if you need it.
6. Pay lump sums into your loan
If you get an inheritance, a large tax return, or some other lump sum payment, pay some or all of it into your loan. Make your home your priority, and the freedom of having no home loan debt will come much sooner.
7. Don’t stretch yourself when buying a home
When buying a home, you may be torn between the dream (read ‘expensive’) home and the home that you can comfortably manage financially. If your goal is to pay down your loan as fast as possible, you probably should go for the cheaper home. That way you can make extra repayments, or have a shorter loan term, without any financial stress.
8. Save a 20% deposit
To keep interest rates and repayments as low as possible, it’s ideal to have a 20% deposit and enough to pay stamp duty saved in the bank. If you have to borrow more than 80% of the value of a property, you will have to pay a higher interest rate and pay lenders mortgage insurance. Over the life of a loan, that will set you back tens of thousands of dollars, if not more. I acknowledge this is not always possible, but it is ideal.
9. Put extra funds into investments with a higher return
This strategy is not commonly used, but when done correctly, can be the best of them all. The idea is not to put surplus funds into your loan, but instead, into an investment with a higher return. Are you better off paying extra money into your home loan at 3.2%, or into a low cost index fund that can see potential returns of 6-15% per annum? Not only do you see higher returns, but if you reinvest those returns, compound interest can do its thing and quickly build your wealth. After a period of time, you may have enough to pay off your home, much quicker than if you’d been making additional repayments. But beware, while you may see a pattern of profits over many years, you can still lose money in the share market. It’s not a guaranteed money making strategy.
Paying your mortgage off quickly comes down to one simple premise, you have to pay more money into the loan than the minimum repayments required. It’s as simple as that, but that requires a strategy and commitment. Even in strategy number nine above, at some stage you’ll have to take money out of your investments to pay down your loan.
So, if you want to pay off your home loan 10-15 years quicker, and enjoy the financial freedom that comes with owning your own home outright, choose a couple of the strategies above and stick with them for the long haul. You’ll be so glad you did.