One of the greatest investments you can make is buying a home. When it comes to paying off your debt and attaining the mortgage-free dream, you can maximise your equity by doing it sooner rather than later.
Having a lender that allows you to finalise your mortgage early can reduce the amount of interest you pay on your home loan and see you paying off your loan years earlier.
Here are ten ways to save money by paying off your mortgage faster.
1. Increase your minimum repayment amount
Making higher regular repayments on your home loan can quickly make a noticeable difference, provided your lender is flexible with extra repayment arrangements.
In the case of interest rates declining, you may feel tempted to adjust your repayments in order to pay less monthly, but if you continue to make those higher repayments the lifespan of your loan and the amount of interest you’ll have to pay will be substantially smaller.
Even small increments, like rounding up your payments, can save you interest over the life of your home loan. Check with your lender whether they charge a fee for the early discharge of a mortgage to ensure this strategy will be of benefit.
2. Make repayments more frequently
By switching to fortnightly or weekly repayments, you’ll pay an extra month of your home loan each year. Over the course of your loan, this small but effective technique stacks up to shed years off your mortgage.
Consider aligning your repayments with your income cycle so they come out the day after your salary is paid to avoid unwelcome late fees or budgeting errors.
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3. Make Extra Repayments
The first five to eight years of a home loan is when you’re mostly paying off the interest, so any lump sum payments you put down in that time will help you reduce the amount of interest and get you paying off the principal sooner.
Consider putting your yearly tax return, bonus or any inheritance you might receive onto your home loan.
Extra payments will cut down your loan term significantly, but you might be worried about reducing your emergency savings by doing so. In this case, opting for a redraw facility with your home loan package means the extra money you put on your home loan can still be accessed if you need it later on.
Cutting back on certain luxury spending is another way you can save a lump sum of money to top up your home loan. Talk to your lender first, and try to get a home loan that doesn’t charge additional fees for making extra payments.
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4. Use a 100% offset account
Offset accounts act like a regular transaction or savings account but they’re attached to your home loan. If your home loan package comes with a 100% offset account, you can use it to reduce the amount of interest you pay on your loan daily.
With an offset account, you pay interest on your loan amount minus your offset account balance. If the balance you keep in your offset account is minimal, it might not be worth paying to have this additional feature on your home loan.
Use our calculator to compare home loans and find a deal with more features.
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5. Refinance or renegotiate your home loan
When interest rates drop, people often feel stuck paying their home loans off at a higher rate. Being complacent about the property market and not being proactive about your home loan will not help you on your path to financial freedom.
Rates change and new product offerings often become available, so take advantage of all the strategies at your fingertips and shop around if you have to.
The first and easiest step, however, is renegotiating your rate or product features with your existing lender. You can ask your lender to match a better rate you find elsewhere, or request they drop any costly features that aren’t helping you in order to bring your interest rate down.
If your bank isn’t meeting your expectations or reflecting the current market, you can opt to refinance with another lender to secure a competitive interest rate that could save you the difference of thousands of dollars and years on your home loan.
Make sure the money you save in interest outweighs the fees you may incur when switching lenders and home loans.
6. Create a budget plan
Maintaining a money management plan allows you to free up more money to put towards your home loan. Determine which items you can forgo or cut back on and put that money to better use on your mortgage. Learning to let go of keeping up with Joneses goes a long way towards setting you up for financial freedom in the future. Just giving up your daily coffee from your favourite cafe could save you as much as $2,000 per year. Imagine how much more money you could put towards your mortgage with savvier spending habits.
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7. Extra income
There are many ways to source extra income if you want to pay off your mortgage faster. You could get a second job, start a side-hustle, rent out a room or ask your boss for a pay rise. Put this extra cash towards your home loan as additional repayments.
8. Consolidate your debt
Prioritising your debts by paying off thoses with the highest interest rates the quickest is a solid financial strategy. However, by rolling your existing debts into your home loan, you might be able to take advantage of lower interest rates.
Be careful not to pay all that extra debt off over a 30-year term. You may be able to consolidate your debt into a separate loan account attached to your home loan, and still get that lower interest rate while paying off the debt over a shorter term.
Soon enough, you’ll have more money available to put towards your home loan!
9. Don’t opt for an interest-only loan
If you can, avoid an interest-only home loan. These home loans mean that for a fixed period of time (usually five years) you only pay the interest portion on your home loan rather than the interest and principal.
While you will feel a short-term benefit, in the long run it’s likely you’ll pay more across the life of your loan because during the interest-only period you won’t reduce the loan amount. This can mean there’s more interest for you to pay later, too.
10. Leverage your equity
If you’ve already paid some of your home loan balance, you will have accrued equity. Equity is the current value of your home minus the amount you owe.
Using your equity to fund expensive purchases you would usually put on a credit card, like a car or vacation, means you can repay them at a lower interest rate.
You can also use the equity in your home to your advantage to create more equity. One way of doing this is to secure a home equity loan to renovate your home for the purpose of increasing its value. This is a good option for homeowners who may want to eventually sell their home and make a larger return.
Another option is to use the available equity in your home as a deposit for an investment property. Down the track, you can sell the investment property in order to pay off your home mortgage sooner.
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Always ensure you keep up-to-date with the current interest rates and products, and check the health of your mortgage regularly to know whether you’re making good progress with your home loan so you can stay ahead of the game.
Words by Katy Holliday
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