If you’ve recently had a home loan approved or are already some way into your repayments, you may be thinking about how you can pay it off sooner rather than later. We explore some smart ways to shave interest – and years – off your mortgage.
Note that examples are indicative only, and outcomes assume that interest rates will not change and that all repayments are made on time.
1. Increase your repayment frequency
Consider making fortnightly or even weekly repayments instead of monthly.
By choosing fortnightly repayments you'll pay half of your monthly repayments each fortnight. Since there are 26 fortnights every year, this is equivalent to making an extra month's payment each year. This means you'll build equity in your home more quickly, plus pay off your loan sooner and save on interest.
Trevor’s monthly home loan repayment amount is $2,315 on a $400,000 loan with a loan term of 25 years (at a fixed rate of 4.9% p.a.). Paying monthly, Trevor will pay a total of $27,780 in one year ($2,315 x 12).
He decides to pay fortnightly instead, so his repayments become $1,157.50 per fortnight ($2,315 / 2). After 26 fortnights in that year, Trevor pays a total of $30,095 ($1,157.50 x 26), which is equivalent to an extra month's repayment.
With these additional repayments each year, he'll be able to pay off his loan approximately four years sooner as well as save more than $60,000 in interest.
- Total home loan repayment, monthly: $27,780 p.a. x 25 years (@4.9% p.a.) = $694,500
- Total home loan repayment, fortnightly: $30,095 p.a. x 21 years/1 month (@4.9% p.a.) = $634,310*
2. Increase your regular repayment amount
Paying more than your required repayment amount is another way to reach your home ownership goal sooner.
Trevor decides to contribute an extra $386 per month on top of his $2,315 monthly home loan repayment, paying $2,701 each month. Over the course of 12 months he pays $32,412, which is roughly equivalent to two additional months' worth of payments each year.
This will shave six years off Trevor's 25-year loan term as well as around $80,000 in interest.
- Original home loan repayment: $27,780/yr x 25 years (@ 4.9% p.a.) = $694,500
- Revised home loan repayment: $32,412/yr x 19 years (@ 4.9% p.a.) = $614,948*
3. Increase your regular repayment amount AND frequency
Consider the first example where Trevor chooses to pay fortnightly rather than monthly, and is now paying a required minimum repayment of $1,157.50 per fortnight.
Trevor also decides, as per the second example, to increase his repayments by $224.50 per fortnight to $1,382. If he maintains this over the years he'll end up paying off his loan almost six years earlier, saving over $80,000 in interest.
- Current home loan repayment amount: $634,310 over 21 years/1 month ($1,157.50/fortnight)
- New scenario home loan repayment amount: $550,036 over 15 years/4 months ($1,382/fortnight)*
Compared to his original 25-year loan this is a saving of more than $140,000 in interest repayments and a reduction of around nine-and-a-half years off the term of the loan.
* Source: ASIC MoneySmart mortgage calculator
4. Make extra lump sum payments
Making extra lump sum payments – especially during the early years of your home loan – can have a profound effect on how much your total home loan repayments will be and the length of time to own your property outright.
Kate’s required monthly repayment amount is $2,485 on a $400,000 loan with a loan term of 25 years. Over the term of the loan she'll pay a total of $29,820 in one year ($2,485 x 12), and over 25 years, Kate will pay $745,500.
Five years into the loan, Kate receives an inheritance of $70,000. Dividing the money, she puts $40,000 into her home loan and $30,000 into her bank account.
Making the lump sum repayment of $40,000 means that instead of paying off her loan after 25 years, she will reduce the loan term by more than three years – assuming her repayments remain the same – and save herself more than $70,000 in interest.
5. Set up a mortgage offset account
A mortgage offset account allows you to offset, or reduce, the interest charged on your home loan by letting you pay down the principal loan amount with your savings.
Say you have a home loan balance of $400,000, and you put $20,000 into an offset account. By doing this, you’ll only need to pay interest on a balance of $380,000 ($400,000 - $20,000) rather than $400,000.
The more money you have in an offset account, up to the balance of the loan, the bigger the savings and the faster your loan can be paid off.