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Published December 14, 2022
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How to Pay Off Your Mortgage Faster

Pay off your mortgage early by making extra payments, switching to fortnightly payments, opening a redraw facility, offset account, refinancing and more.

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Knowing how to pay off your mortgage early is something all homeowners should do to reduce debt while create wealth. Doing so will also be beneficial to your financial health in a number of ways, such as improving your credit rating and freeing you up to invest in another property or other assets if you so desire.  

Everyone wants to pay their mortgage off early, or to put it another way, no one wants to be saddled with hundreds of thousands of dollars in debt over decades if they can possibly avoid it. The good news is that there are practical ways to reduce your mortgage. How successful you are in implementing any or all of these strategies and sticking to them could well determine whether you shave months, years or even decades off the term of your mortgage and save a fortune in the process.  

Whether you’re a first home buyer or you’ve had your mortgage for years now, you can still benefit from any or all of the following measures.

1. Make extra payments

Extra repayments can cut years off your mortgage. While making extra payments may seem like a no-brainer, it is worth doing a few simple calculations to see just how far ahead you can get with a fortnightly or monthly top up to your existing commitment.

For example, let’s say you’ve taken out a $500,000 mortgage over 25 years with a standard variable interest rate of 4.34% and monthly repayments of $2,744. The total cost of this mortgage will be $823,185. 

However, if you paid an additional $100 a month from the outset of the mortgage, the total repayment amount would be only $800,658, saving you around $22,500 off the total, while the term of the mortgage would also be reduced to 23 years and six months. In the same scenario if you paid an extra $50 a month, your total repayment amount is reduced to $811,484 and the term to 24 years and three months.

It’s also worth noting that for the first five years of a standard principal and interest mortgage the majority of your repayments will go toward paying interest, so anything extra you can put toward repayments will pay off big time down the track. This also could include tax returns or bonuses, where a few thousand dollars now can mean a lot more saved in the future. Additionally, making extra payments will provide you with a greater buffer if interest rates rise or if you encounter financial hardship going forward that makes it harder to make repayments. 

Most lenders don’t charge fees for extra payments on standard mortgages, but just remember to check with your lender if you haven’t already.  

2. Switch to fortnightly payments

Switching to a fortnightly repayment structure will save you money simply because you’re doubling the payment frequency. At least, aas long as you adjust your repayments to half of what your monthly payments are. By moving to a fortnightly payment schedule, you’ll also be making the equivalent of an extra month’s repayment each year, where there are 26 fortnights as opposed to only 12 months.

» MORE: How to calculate mortgage repayments

3. Switch loans/find a lower interest rate

As a first-home buyer, or anyone with a mortgage for that matter, you should always be looking for the best possible terms and conditions. That means finding the best possible interest rate.

Just beware that switching lenders can come with a raft of charges such as early repayment fees. So, you’ll need to do some calculations, perhaps with the help of a mortgage broker or financial planner, to see if you’re still ahead. You should also check that any new mortgage has the features you want and that there aren’t hidden fees and charges awaiting you now or at some point down the track.

Alternatively, once you’ve found a better interest rate than your current one, you can ask your lender to match the deal. That could potentially save you the hours of hassle involved in changing lenders.

Once you’ve made the switch to a lower interest rate mortgage, continuing to pay it off at the same rate that you were paying with the higher interest rate will, just like making extra repayments, save you money in the long term.  

4. Take out a fixed interest loan

Fixed interest loans allow you to take out a mortgage for less than the standard variable rate at the start of your mortgage period, generally for up to the first five years.

However, fixed loans usually come with a whole lot of conditions that preclude you, the mortgagee, from taking full advantage of mortgage features, such as redraw and offset facilities or the ability to make extra repayments at all. So, it is debatable whether a fixed loan will help you get on top of your mortgage the way the other strategies on this list will. Unless you can invest the money you save with your lower interest rate successfully, which will invariably require a higher level of risk than you should be contemplating as a new homeowner. 

5. Debt consolidation

Debt consolidation, or moving all your debt onto your mortgage, is a strategy you should definitely contemplate if you have outstanding personal loans, car loans and credit cards. These all attract much higher interest rates than home loan rates so this will definitely pay off in the long term, despite it seeming counterintuitive to increase the size of your mortgage. 

One way to consolidate debt is to get a valuation on your property after you’ve been living in it for a year and if your loan to value ratio is less than 80%, you can apply for a loan top-up to that threshold. Alternatively, you could always ask your lender to consolidate any existing debt at the outset of your mortgage, which may be easier if the other loans are with the same lender. 

Debt consolidation also will greatly simplify your finances as you only have to make the one repayment monthly or fortnightly and it’s much easier to keep track of your debt. Consolidating your debt also will make it easier for you to apply some of the other strategies on this list to your situation. 

6. Invest your additional income

In much the same way as you save for a deposit, you could find new or current ways to make extra money that you could periodically use to pay off your mortgage, instead of simply paying extra off your regular mortgage bill. 

By using different asset classes, such as shares and derivatives like exchange traded funds (EFTs) or cryptocurrency, you may be able to get ahead more quickly. Be aware of the pitfalls, however, and the simple fact that higher reward usually entails higher risk when it comes to investing. It’s always good to talk to a financial planner about what strategy is best if you already have financial assets or are thinking about purchasing some.

Additionally, you may have experience in collectibles, such as LPs or coins that will make you money, or an online business. Then you’d be better off investing and reinvesting, and using the proceeds to pay off larger sums of your mortgage, as long as, with any other type of investment, you have a good grasp of what you’re doing. 

7. Open a redraw facility

A redraw facility is one that allows you to pay off your mortgage at a higher rate than your regular repayments or make extra one-off payments then redraw the money later if needed for a medical emergency or renovations, for instance.

The beauty of a redraw facility is that the money in the account is taken off the mortgage for interest purposes. So, if you owe $100,000 on your mortgage but have $10,000 in a redraw account, you only pay interest on $90,000. Talk to your lender about setting up a redraw facility on your mortgage if you don’t have one already.

8. Open an offset account

An offset account is basically a savings or transaction account linked to your mortgage which, like a redraw facility, reduces the total amount of interest you’ll have to pay as the account balance is offset against the mortgage total. Both redraw and offset accounts have their pros and cons and it’s always a good idea to speak to an expert to see which one best suits your needs, or if a combination of both would be better still.

» MORE: How to make the most of your offset account 

Stay within your comfort zone

As a first-time home buyer you’re undoubtedly keen to come out of the blocks sprinting, but it may pay to err on the side of caution initially instead of being overzealous with your mortgage repayments. 

Work out a budget you’re comfortable with that isn’t going to place unnecessary stress on your finances and try to plan for adverse circumstances should they eventuate. Once you’ve proven that you can cope with your budget plan and regularly have money left over, say after six months, you can be more aggressive with your reduction plan of action. 

Remember, a mortgage is a marathon, not a sprint, so you need to establish financial stability from the outset.

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