With interest rates in Australia at an all-time low but not expected to stick for much longer, now is the best time to look at your current financial situation, take some action towards paying off your home loan and get closer to the coveted debt-free status.
For those who don’t know where to start, here are five ways to pay off your mortgage faster.
#1 Find a lower, competitive interest rate
The mortgage market is highly competitive at the moment, with over 4,000 lenders vying for your attention, so it shouldn’t be difficult to find a lower interest rate. If your bank won’t budge, check out alternative leaders who are putting pressure on the Big 4.
How do I ask for a better rate? Work out what features of your current loan you want to keep and compare the interest rates on similar loans at different lenders. If you find a better rate elsewhere you should grab it, otherwise, you can also ask your current lender to match it or offer you a cheaper alternative.
Note: It’s important to ensure you are seen as a good candidate with a good credit rating and the ability to meet repayments when applying for a loan.
#2 Stay away from ‘interest-only
Although there are benefits associated with an interest-only loan, such as lower repayments that will allow you to pay off less, and retain more cash liquidity, it will not assist you in paying off your mortgage quicker.
Why? Choosing to only pay the interest on your loan for a set period of time will mean once the interest-only period expires, the required principal amount will need to be paid off at a higher propensity (which can sometimes be thousands of extra dollars in interest).
#3 Unlock the power of redraw and offset
Offset accounts are similar to an everyday savings bank account, however, they are linked to your home or investment loan.
Instead of being paid separate interest on your savings by the bank, the value of any cash in an offset account is deducted from your home loan balance (with interest calculated on the difference).
This can be a great way to make your savings work for you, as you’ll normally save more in home loan interest than you’d likely earn on a separate savings account (especially now that interest rates are so low).
#4 Increase your regular repayment amount
Increasing your regular repayment amount is a simple way you may be able to pay off your home loan faster.
Major banks calculate interest on a daily basis, which means during a typical 25-year principal and interest mortgage, most of your payments in the first five years will go towards paying off interest. This means anything extra you put in during that time will reduce the amount of interest you pay.
You don’t have to repay a whole lot extra to reap valuable rewards. Even a dollar or two a day could help you shorten the life of your loan.
#5 Make extra lump sum repayments
If you’ve received a lump-sum payment, consider diverting these funds to your loan.
Gather up your end-of-year bonuses, tax refund, or spare cash from selling unwanted items around the house. Everything helps and being able to allocate these additional funds will make a big difference over time to help pay off your mortgage in no time.
Note: Check with your mortgage provider to determine whether you will need to pay any fees for making any extra repayments.
While not all Aussies are in the financial position to pay off their entire mortgage within the next year or so, it’s important to remember there are a lot of options available. No matter what your situation, now is the best time to scope out the best deals on the market, especially while interest rates remain low.
Haupt, B: (2021, February 10). Five ways to pay off your mortgage faster. Finextra Research. https://www.finextra.com/blogposting/19856/five-ways-to-pay-off-your-mortgage-faster
