How to pay off your mortgage faster
There are many ways to cut years off your mortgage and things you can do to reduce your mortgage term at every stage of the process – right from the application down to the final years. Below we have outlined some tips for each stage of the process to help you to pay off your home loan sooner.
When applying for your mortgage
Ask these questions and make these considerations before and during the mortgage application stage to get the right deal on your home loan:
Make sure you choose the right loan for your situation
When you are choosing a home loan, it is important to choose the right one for your financial situation. The best loan for your friend or neighbour is not necessarily the best loan that exists, and the right home loan for you might not be the same.
Take time to shop around. Work with an independent broker or financial advisor who can help you find the home loan that is best for you. The team at Niche Living Home Loans are here to help – check out our guide to finding the right home loan for you or give us a call to set up a free advisory meeting.
Read the Small Print on ‘Honeymoon Rates’
Many mortgage lenders will advertise discounted interest rates to attract new customers known as ‘honeymoon rates’. However, it’s important to be aware that a honeymoon interest rate on your loan will only last for a short term; it may only last a year, after which you will be paying a higher rate. Sometimes choosing a loan based on the honeymoon rate can end up being more expensive once the normal rate kicks in, compared to another lender who might not be offering honeymoon rate but they do offer a slightly lower long-term interest rate.
The lower the interest rate you can get on your home loan, the less you will end up paying over the term of your loan. For the first few years of your mortgage you will usually find that all you are paying off is the accumulating interest and not any of the principal sum of the loan. But in order to shave years off your mortgage you need to be chipping into the principal sum as early and as much as possible, rather than just keeping up with the interest fees. Therefore a lower interest rate will help to shave years off your mortgage, and you should take the long-term view when calculating the best interest rate on the market.
If They Don’t Ask, Mention Your Profession
The more information your financial advisor or lender has about you, the better he or she can work to find a loan that is tailored to your needs. In some cases, certain professionals are eligible for discounts on home loan rates.
Don’t Rule Out Small Lenders
Just because you have not heard of a lender does not mean that you should write them off as inexperienced. If they offer competitive interest rates and attractive home loan packages, they are probably worth looking into.
Consider Hedging your Bets with a Fixed/Variable Split Rate Loan
Trying to get the lowest rate on your home loan can be tricky, and there is not necessarily a best way to go about it. Work with a professional, and consider a split loan, where part of the loan is fixed and part of it is variable. When interest rates rise, you’ll know that part of your loan is fixed at a set rate. But, if rates go down, you get the added benefit of having part of your loan at a lower rate.
Negotiate Money Saving Add-Ons with your Mortgage Package
Different mortgages come with various extras, so make sure to ask! These could be anything from fee-free transaction accounts or credit cards, to discounted home insurance and more.
These might sound like small change benefits when compared to the large sum you are borrowing, but you can use the savings you make on these perks to make additional payments on your mortgage – remember the faster you pay it off, the less you’ll spend on interest.
At the Beginning of Your Mortgage Term
Pay All Fees Up Front
You may have the option of adding fees to the amount of your loan, but it is always more expensive to do this – you will end up paying interest on your loan fees. Paying off the loan fees as an upfront sum is a small investment that will certainly benefit you in the long-term.
Pay your First Instalment ASAP
Paying the first instalment on the settlement date will put you one payment ahead of your lender!
Make Additional Repayments and Lump Sums When Possible
As mentioned previously, for the first few years of your mortgage you will usually find that all you are paying off is the accumulating interest and not any of the principal sum of the loan. But in order to shave years off your mortgage you need to be chipping into the principal sum as early and as much as possible, rather than just keeping up with the interest fees.
By paying more than the minimum monthly repayment and making additional repayments or lumps sums whenever you have some additional income you will not only knock off some extra payments early on, but you’ll chip away at you principal sum, meaning you’ll be paying lower interest overall (as interest calculated as a percentage of the principal), thus potentially shaving years off your mortgage term!
Through the Years
Make Fortnightly Payments
This seems like an insignificant change, but it will make a huge difference to your loan term over the years. Instead of making your repayments in monthly instalments, make them fortnightly. Over the course of a year this results in one full month’s additional payment per year (as there are 26 fortnights and only 12 months in a year).
You won’t feel this additional payment but over the term of your loan it will shave off years as well as tens of thousands of dollars in interest.
Get an Offset Account
An offset account is a savings account that is connected to your home loan. Rather than accruing interest, the amount in this savings account will shave some interest off of your home loan. The more interest you pay off, the faster you’ll pay off your loan.
Because you aren’t earning any income from the account, it won’t add anything to your taxable income. The best offset accounts earn enough interest to completely offset the interest on your loan – i.e. 100 percent offset loans.
Cut Back a Little on Luxuries
We’re not saying you should be living your life eating bread and water and shunning a social life in favour of making larger loan repayments, but cutting down a little on luxuries and putting that money into your loan repayments can have a great impact over time.
Say for example you are used to spending $6 on your morning coffee, $4 in the vending machine at work, $20 on lunch, $10 on a drink with co-workers or clients after work and $5 for a bottle of water at the gym each day, that would add up to $45 every workday. That’s $225 every week, which is $900 a month or and $10,800 a year.
Cutting out just two of those lunches every week and a few morning coffees would mean you could pay an additional $3,000 off your mortgage every year. And cutting these simple luxuries down to just once a week would allow you to make an additional $720 repayment on your mortgage every month.
So if you had a $400,000 home loan at a 5% interest rate over 25 years, spending an extra $720 per month on your loan repayments would save you over $120,000 in interest and would shave roughly 9 years off your mortgage term. Suddenly those morning coffees don’t seem so necessary!
Stay on Top of the Latest Rates and the Status of Your Mortgage
The mortgage that was right for you when you purchased your home may not always be the right loan for you. Your circumstances change, as does the loan market. Make a habit of auditing your situation and the market annually and if you think something better might be out there talk to a financial advisor or broker (like us!) to further assess your situation and ensure you’re always getting the best deal.
Don’t be Afraid to Switch Lenders if the Deal is Right
You do have the option to refinance, but make sure to discuss this with a mortgage professional before taking the leap. The team at Niche Living Home Loans is always on hand to offer you free, no-obligation advice!
Refinance to consolidate your debts
Credit card and personal loan interest rates are much higher than home loan interest rates, so in theory refinancing to add these debts to your home loan may mean you could save on interest. This can be a helpful option if you’re struggling to keep on top of all of your debts but it might not be right for everyone. Find out more in our resource on refinancing to consolidate debt, and call one of our helpful team to discuss your situation further.
For the Higher Risk-Tolerant
Use an Equity Loan to Invest
The difference between what your property is currently worth and the amount you still owe your lender is called equity. Once you have paid a portion of your loan, you have equity in your home.
You may be able to borrow money, up to the amount of equity you own, using the equity in your home as collateral. And putting that money in a portfolio of investments could mean you end up with more than you started with, and allow you to pay off your home loan faster. However – make sure to consult a financial advisor to safely invest in a diverse range of areas that are compatible with your risk tolerance.
Invest savings made from lower interest rates
If you budgeted for higher interest rates – maybe you have a variable rate mortgage and interest rates have gone down – ensure you do something positive with those savings that will help you to earn money and pay off your mortgage quicker. Again choose your investments wisely.
For the Lower Risk-Tolerant
Use an Equity Loan to Renovate
If you are less risk tolerant you might want not want to draw down an equity loan to invest in a portfolio of stocks or some other opportunity where the risks are unclear.
But you can still put an equity loan to good use. If your home is a bit of a ‘fixer-upper’ you could use an equity loan to renovate, thus increasing the value of your home and your equity.
How can Nicheliving Home Loans help?
Everyone dreams of paying off their mortgage faster, but everyone’s situation is different. Some of the above strategies may work for you and some may not. Niche Living Home Loans can offer free, independent and no-obligation advice on how to better your situation and get your home loan paid off as soon as possible. Contact us today to set up an appointment.