How to Pay Off Your Mortgage Faster
Paying off your mortgage faster can help you to achieve financial security years ahead of time. Here are three simple strategies you can use to pay off your home sooner and become debt-free.
1. Halve your monthly repayments and make them fortnightly instead
If you are currently making monthly repayments on your home loan, switching to fortnightly can help you to afford to make an extra repayment each year. This is best demonstrated by using an example.
Example 1
According to the latest figures from the Australian Bureau of Statistics, the average Australian mortgage is $384,700. If you were paying off that amount over a standard 25-year home loan term at an interest rate of 3%, your monthly repayments would be $1,824. You would hence make 12 monthly repayments each year (a total of $21,888).
However, if you divided your monthly repayment by two and paid $912 per fortnight instead, you would pay 26 fortnightly repayments per year which is a total of $23,712 per year. This equates to an extra monthly repayment of $1,814 per year (i.e. $23,712 less $21,288).
The reason to explain the extra amount is that there are 26 fortnights per year compared to 12 months. There are also slightly more than 2 fortnights in every month of the year except February. Thus, over the course of the year, paying fortnightly adds up to an extra month’s worth of repayments.
If these $912 fortnightly repayments were made on the $384,700 mortgage instead of monthly repayments of $1824, the loan would be paid off in 22 years and 3 months instead of 25. In other words, you would pay off your home 2 years and 9 months earlier. You would also save $22,845 in interest.
2. Take out a mortgage offset facility
A mortgage offset facility allows you to offset any interest you earn on another account from your home loan.
Example 2
If you owe $300,000 on your home loan and you have $20,000 in an offset account for emergencies or other expenses, you will only be charged home loan interest on $280,000 (i.e. $300,000 less $20,000), rather than the full $300,000 that you owe on your home loan.
3. Refinance to a loan with a lower interest rate
It’s important to understand that even a small difference in home loan interest rates can make a big difference to how long it will take to repay your home loan. Again, this concept is best explained using an example.
Example 3
Let’s assume that you owe the average Australian mortgage amount of $384,700 and that your home loan provider is charging you an interest rate of 4% instead of the 3% that was charged in Example 1 earlier in this article.
If you were being charged 4%, your fortnightly home loan repayments over 25 years would be $1,015.50.
However, if you refinanced to a home loan at a 3% interest rate and continued to pay the same $1,015.50 fortnightly amount, you would pay off your home in 19 years and 3 months instead. In other words, you would pay off your home 5 years and 9 months sooner simply by refinancing. You wouldn’t need to make any extra repayments to pay off your home loan faster.
It’s important to understand that there is usually a cost to refinancing. However, if the benefits outweigh the costs, then refinancing is a worthwhile financial decision. You should consider refinancing your home loan whenever your individual financial circumstances or market conditions change. Interest rates in Australia are currently at record lows and it may be an ideal time to re-evaluate your finances if your employment has been affected by the COVID-19 pandemic.
The bottom line
Paying off your home faster helps you to set up your financial future and freedom. Although these are just three simple ways you can pay off your home sooner, you can find other ideas here.
