Your mortgage is probably one of the biggest financial commitments you’ll have in your life. And with significant interest costs accruing over time, it makes sense to get rid of it sooner rather than later.
There are a few ways to do this – none of which relies on a winning Lotto ticket.
One of the most common ways to get mortgage-free faster is just to increase the amount you pay each time you come off a fixed term. Many people assume that, because they could only afford to pay off a little bit more, there’s no point in doing so. But, in reality, even a small amount extra can make a big difference.
If you have a $400,000 mortgage on an interest rate of 5 per cent over a 25-year term, your minimum repayment will be $1079 a fortnight. But if you can increase the payment to $1180 on the same loan terms, you’ll be on track to pay off the mortgage in 21 years and two months, saving more than $52,000 in interest.
You can make the most of falling interest rates by keeping your repayments at their previous level when you fix on a cheaper deal.
For example, if you had a $500,000 mortgage at a 5.5 per cent interest rate, you’d pay $1416 a fortnight over 25 years. But if you refixed on 4 per cent and kept your payments the same, you’d pay off your loan four years faster.
This is usually a pain-free option, as you already had that level of repayment in your budget, anyway.
If you are currently repaying your mortgage on a monthly basis, consider cutting those payments in half and paying them fortnightly (especially if you receive your salary on a fortnightly basis).
There are 26 fortnights in a year, so you could essentially squeeze in the equivalent of one extra monthly payment every year. For example, if your monthly repayments are $2,000, each year you will pay $24,000 (12 times $2,000). But if you split your monthly payment in half and made a fortnightly payment of $1,000, you would pay $26,000 (26 times $1,000) every year.
Making lump-sum payments can be another good way to pay off your mortgage faster and reduce your overall interest costs. To give you an example, if you make an extra $10,000 payment, after three years, on a $300,000 mortgage, you can save almost $20,000 over the life of your mortgage on current interest rates – and even more if rates rise in the future.
Of course, this option is pretty straightforward if you have a floating rate mortgage. But if you have a fixed-rate home loan, keep in mind that there could be a break cost if you pay back all or part of your fixed-rate mortgage during a fixed period. All lenders have different criteria, so please get in touch to find out what your lender will allow you to pay extra on a fixed rate, without penalties.
If you are very disciplined and a good budgeter, you can also consider using a revolving credit facility to minimise your interest bill.
Generally speaking, a portion of your home loan will be set up a bit like a large overdraft. All your income then goes into that each month, reducing the amount of debt on which interest accrues. At the end of the month, you pay your bills from the account.
However, the convenience of revolving credit doesn’t always outweigh its disadvantages. As mortgage advisers, we can help you understand if this strategy is right for you, and if that’s the case, how to set it up.
Like to take a closer look at your mortgage structure? Please don’t hesitate to contact us. We’ll be happy to answer all of your questions and work with you on a strategy to get mortgage-free faster.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek advice from a financial adviser.