Want to pay off your mortgage faster?
Paying off your mortgage - or home loan - as quickly as possible will not only help you save money in the long term, it will give you financial freedom. As the largest debt most people will carry, it makes sense to pay it off as quickly as possible so you can own your property outright.
Read our Q&A explainer for a list of practical tips on how to pay off your mortgage as fast as possible. This article will be relevant if you are a:
If this is your first property purchase you may want to start by understanding how mortgage repayments work, as this is good background reading for this topic.
Our hints and tips for paying off your mortgage faster include a range of practical strategies you can leverage to minimise interest expense and pay off the loan principal as quickly as possible.
If you want to get a head start on paying your mortgage off faster, opt for a variable rate or split rate mortgage. Why? This type of loan often has features like extra repayments, a redraw facility or an offset account. These are all features that can help you pay off the loan faster.
An offset account allows you to put your salary and savings against the loan amount, which reduces the overall interest you pay. Fixed interest rate loans usually limit the amount of extra repayments you can make, and do not come with an offset feature. Second best option is to opt for a split rate loan, which combines elements of a variable and fixed - so you can make extra repayments on the variable portion, or offset to repay your loan faster. Yard offers loans with up to 5 splits.
If you can afford it, making extra repayments to your home loan is a great way to help pay your mortgage off quicker. Extra lump sums or regular additional repayments can help cut years off the term of your home loan, especially in the early stages of a typical 30 year principal and interest term. Variable or split rate loans generally allow extra repayments, while fixed rate terms limit the amount of additional repayments you can make per year. There are two ways you can make extra repayments:
Use our home loan payment calculator as a guide to what your mortgage repayments could be for a new home loan. It provides an estimate of your loan repayment, the total amount of interest you will pay over the life of the loan and the speed at which you will pay down the principal over the life of the loan. Our calculator assumes that you are making principal & interest repayments towards your loan.
Monthly repayments are the typical mortgage repayments required on home loans, but you should consider the benefits of fortnightly repayments - assuming they align with your personal circumstances. Choosing an increased mortgage repayment frequency will save you money on interest and decrease the overall term of your loan.
Because there are 26 fortnights in a year, if you switch to paying every two weeks you will be effectively making an extra month's repayment each year.
A mortgage offset account - or 100% offset account - allows you to put your salary and savings against the total loan amount, which reduces the overall interest you pay. This effectively lets you offset the principal portion of the loan with everything you have in the offset account.
Example: You have a home loan of $500,000 and deposit $50,000 of your savings into the offset account. You will now only be paying interest on $450,000 ($500,000 - $50,000), and not $500,000.
You also have the option of choosing how you repay your loan, with two types of home loan repayments: principal and interest vs interest only.
Principal and interest is when part of your monthly repayments pay down a portion of the loan amount (called the principal) and the interest charges on the loan. You will generally pay off your loan quicker with principal and interest repayments, though you need to be sure this suits your financial circumstances. With an interest only loan your repayments are only paying off the interest portion of the loan, and effectively prolonging your debt.
If you are tempted by some of the introductory offers - or honeymoon rates - some home loan providers have, be aware of the pitfalls. These offers typically lure you in with a low rate, but then revert to a higher interest rate after your introductory period is over. This can be after anywhere from a year to two years.
Ask to see the key facts sheet for each home loan you review. This details all the key features of a home loan, including interest rates, fees, repayment amounts and the total amount you’ll have to pay back over the lifetime of the loan. The key facts sheet will allow you to compare each loan so you can decide which is right for you.
The overall length of your loan term is a big factor in determining how much your weekly/fortnightly/monthly repayments will be - but also how much interest you pay. If you can afford it you should try opt for a shorter term, though this does mean your repayments will be higher. Home loans typically run for anywhere between 10 and 30 years.
Example: Using our online mortgage calculator we can see how loan term length impacts your repayments and total interest paid - assuming a loan amount of $500,000 and an interest rate of 3.5%. As you can see there is a significant difference in the total interest paid and monthly repayments over the lifetime of a 30 year vs 20 year loan vs 10 year loan.
Our next tip is simple: prioritise paying off your home loan by putting it front of mind. That could mean making sacrifices and foregoing some luxuries - like that expensive overseas holiday or new car purchase. If you are organised and disciplined you can develop some good habits, like tracking all your spending, paying off all your credit cards and outstanding loans - and getting the best deal from all your utility providers.
Analyse your outgoings on a daily, weekly and monthly basis and look for ways to limit your expenditure. Sometimes cutting back on small things can actually make a difference. A $4.30 takeaway coffee bought every day of the week on the way to work adds up to $93/month and $1,118 over a year.
If you currently have a mortgage you should also consider finding a lower interest rate.
A lower interest rate on a new mortgage translates into lower monthly repayments, which reduces the length of your loan - and means you will pay off your loan in less time.
The easiest way of doing this is by switching to another home loan, otherwise known as refinancing. You can switch or refinance at any time if you are on a variable rate home loan without a break fee. If you have a fixed rate home loan you can still switch but you are likely to have to pay a break fee.
If you are refinancing look to match the term you currently have. If you extend the loan term you are likely to pay more interest and prolong how long it takes you to pay off your mortgage.
Armed with this knowledge you should now be in a better position to pay your mortgage off in record time.
Have any questions about repayments and home loans? We’re here to help, with a friendly local team available to chat at a time that suits you.