Well done! You are now a proud property owner. Acquiring real estate is always a thrilling and eye-opening experience. Whether it's your first residence or a property for business, it will offer you new options and hurdles. Unless you purchased it outright, you will likely be paying off a mortgage, usually over a 25-30 year span.
Fortunately, there are several strategies you can use to pay off your mortgage early and dodge paying extra interest. Here are four successful ways to expedite the repayment of your home loan.
Solution 1: Try switching from monthly to biweekly payments.
This way, you can pay off a bit extra each year without having to make a large sacrifice to your financial reserves. Even though there are 12 months in a year, there are 26 fortnights, meaning you would actually be adding on an extra month's instalment annually. This can be beneficial in reducing the duration of your loan.
For instance, if your minimum payment is $3,000 a month, you can switch to making $1,500 fortnightly. That means you'll end up paying $39,000 in a year instead of $36,000.
Solution 2: Consider refinancing
A mortgage broker might be able to switch your home loan to a product that has a lower interest rate. Going with a fixed rate mortgage will enable you to make the same interest payments for the duration of the fixed period, but it can limit the number of additional payments you can make. (e.g. most lenders will allow you to make extra repayments amounting not exceeding $10,000 per year).
However, whilst a fixed rate loan will give you certainty of commitment, it won’t enable you to benefit from any interest rate reductions.
By selecting a variable rate home loan, you'll have much more freedom to pay extra when it is convenient for you, and you could end up paying less interest if the rates drop. However, if the rates go up, you may find yourself forking out more than anticipated.
Refinancing isn't for everyone, and can come with some upfront costs such as exit fees and joining fees. However, if you speak to a mortgage broker about your needs, objectives, current financial situation and if you can afford to refinance, it can be incredibly beneficial down the line.
Solution 3: Make extra mortgage repayments
If you have any extra money from a bonus, tax return, or side hustle, consider investing it into your mortgage if your loan structure allows. Making extra lump sum payments here and there can have a major impact on the length of your loan term and can reduce the amount of interest you have to pay.
Making extra mortgage repayments in a lump sum may incur additional fees. We recommend speaking with your local mortgage broker from Smart Mortgage to find out if this repayment strategy is right for you.
Solution 4: Make use of an offset account
Opening an offset account is a wise way to decrease the amount of interest you are charged on your home loan.
An offset account is like a savings account linked directly to your home loan. The balance in your offset account offsets the balance of your home loan, meaning you are only charged interest on the difference. For example, if your home loan balance is $400,000 and you have $75,000 in your offset account, you are only charged interest on $325,000. Although this does not reduce your minimum monthly repayment amount, it does reduce the amount of repayment you have to pay, potentially cutting years off your home loan and saving you thousands of dollars in interest.
These tips may help you to pay off your home loan faster. By speaking to your local Smart Mortgage broker, you can work out which strategy is right for you and potentially reduce both dollars and years off your mortgage.