Paying off your mortgage earlier than expected is every homeowner’s dream.
Not only does this mean increased savings and the ability to redirect your finances towards future investments or retirement, but being mortgage-free creates a new world of possibilities.
Official industry data uncover the best ways to remove your mortgage debt faster.
Simply put, making extra repayments and switching from monthly to fortnightly payments are the first steps in the right direction.
By paying half the monthly amount every two weeks you’ll make the equivalent of an extra month’s repayment annually.
Make extra payments
Extra repayments on your mortgage can cut your loan by years.
Putting your tax refund or bonus into your mortgage could save you thousands in interest.
Official research suggests that on a typical 25-year principal and interest mortgage, most of your payments during the first five to eight years go towards paying off interest.
So anything extra you put in during that time will reduce the amount of interest you pay and shorten the life of your loan.
It’s important to ask your lender if there’s a fee for making extra repayments.
Remember that making extra repayments provides a buffer if interest rates rise in the future.
Find a lower interest rate
If you find a better rate elsewhere, ask your current lender to match it or offer you a cheaper alternative.
Switching loans helps reduce interest and debt
If switching to another lender, make sure the benefits outweigh any fees you’ll pay for closing your current loan and applying for another.
Make higher repayments
Another way to get ahead on your mortgage is to make repayments as if you had a loan with a higher rate of interest.
The extra money will help to pay off your mortgage sooner.
If you switch to a loan with a lower interest rate, keep making the same repayments you had at the higher rate.
If interest rates drop, keep repaying your mortgage at a higher rate.
Consider an offset account
An offset account is a savings or transaction account linked to your mortgage.
Your offset account balance reduces the amount you owe on your mortgage. This reduces the amount of interest you pay and helps you pay off your mortgage faster.
A word of warning: If your offset balance is always low (for example under $10,000), it may not be worth paying for this feature.
Paying both the principal and the interest is the best way to get your mortgage paid off faster.
Most home loans are principal and interest loans.
This means repayments reduce the principal, or amount borrowed, and cover the interest for the period. So, it’s important to have adequate financial backing from the start.
With an interest-only loan, you only pay the interest on the amount you’ve borrowed. However, be mindful that these loans are usually for a set period.
Your principal does not reduce during the interest-only period. This means your debt isn’t going down and you’ll pay more interest.