Enjoying the freedom of being mortgage-free is something many of us wish for however it can be quite challenging when living expenses and interest rates are higher. For many Australians, the key to comfortable retirement is to not to have a mortgage at the time of retirement or earlier. So what does it take to pay off mortgage sooner.
Below are some tips that you may want to consider if you are looking to pay off mortgage sooner.
1. Make more frequent payments
Most home loans are setup as monthly repayments. But if you change your repayment cycle, you could end up making extra repayments. Why not consider changing your repayments to weekly or fortnightly. This way, you’ll end up paying more off your loan each year.
Lets say your monthly repayments are $4,000. By the end of the year, you’ll have repaid $48,000. If you change this to $2,000 a fortnight or $1000 a week, by the end of the year you’ll have repaid $52,000. This is because there are 12 months in a year and 26 fortnights or 52 weeks. Paying weekly or fortnightly you will pay $4000 extra per month.
This extra amount comes directly off your loan principal and reduces the amount on which future interest will be calculated. As the interest is less, more of your repayment goes towards paying off the principal off your loan, so your mortgage gets paid off sooner.
2. Make extra repayments (regular and irregular)
Most home loans allow extra repayments. Fixed rate have limit on extra repayments and variable have no limit. Many lenders let you setup regular transfer to the home loan in recurring cycle. Any amount you pay on top of your minimum repayments reduces the principal of the loan.
For example, if you take out a loan for $650,000 at 6.25% interest rate you are likely to pay monthly repayment of $4003 for next 30 years. if you decide to pay $100 extra per week, you loan will be paid out in approximately 23 years and 1 month. So paying $100 extra per week your loan term will reduce by nearly 7 years in this example.
You can also make lump sum repayment if you get a tax return or bonus from work.
3. Using an offset account
An offset account is like a transaction account but it is linked to your home loan. Depending on your product you may be eligible for offset account. You can set it up to receive all your income into this account and the bank then offsets the balance in your account against your loan balance. As a result, interest is only calculated on the remaining loan balance, which can potentially save you a lot of money in the long term.
Please note that having an offset account may cost you annual or ongoing fee or higher interest rate, please review this product is giving you savings in return.
4. Using accounts with redraw (and no offset)
Most variable home loans allows you to pay extra repayments without penalty. If there is no offset facility some lenders have no ongoing fees on this type of home loan. Many borrowers choose this option and pay extra towards the home loan. As extra repayments sits in redraw, you can access it if required. Any amount you pay extra towards the home loan will reduces the principal of the loan.
5. Fixed and Variable rate loans
Both have their pros and cons. If you want to pay off your loan faster and planning to pay extra, you might opt for a variable rate over fixed. It’s more flexible, letting you make unlimited extra repayments at no cost. Sometimes lenders may offer special fixed rate for certain term that may help you save on a longer run.
If you have a fixed-rate loan you’re stuck with it for the fixed term (1-5 years) and some lenders may allow $10,000 or more extra repayment without penalty. Once the fixed term ends, you can roll it over to variable and make unlimited extra repayments. Don’t forget, until your fixed rate term is up, you may be charged break fees to switch from fixed to variable or if you choose to refinance.
Some borrowers choose to split their loan between fixed and variable rates. If you make additional payments, you’ll need to consider if there are limits on how much extra you can pay on your fixed loan.
6. Get your budget in order
Having a budget in order is essential for achieving your financial goals. A budget helps you stay on top of your expenses, so you can use the ‘extra’ money you save to pay down your loan faster.
Half the battle with budgeting is just being aware of what you are spending. Compare on your regular expenses some common ones are Insurances, energy providers, regular bills and being aware of what are you spending money on.
7. Review your loan with your broker/lender
As a general rule of thumb you should check the health of your home loan every year. It is good to check if you are on a competitive rate, how can you save some money in interest repayments. If there are other lenders offering better rates and refinance may be an option, refinancing to shorter term can be other option. Before you choose to refinance or change your product we suggest you speak to your mortgage broker.
Hope this helps you to understand how you can accelerate your home loan and assist you with paying off your loan sooner, if you would like to discuss more about this content or anything about property, home loans, SMSF please contact us.
