The average mortgage in Australia carries a loan term of 25 to 30 years, but there’s no reason why you should have to take that long to pay yours off.
Paying down your home loan faster is not only rewarding but will give you the peace of mind that you are no longer burdened with significant debt.
Indeed, paying down your debt early could give you the financial freedom to invest in other assets, retire sooner, travel more or simply spend your money on the things you love.
If you would like to reduce the life of your loan, there are a few steps you can take:
1. Review, review, review
First of all, know your numbers. Our data shows that an astonishing 2 in 5 borrowers did not know the interest rate on their mortgage. Which begs the question, if you don’t know how much you’re paying, how do you know you’re not paying too much? Consider how much the interest on your mortgage adds up over the life of the loan. You could stand to save thousands if you pay your mortgage off before the end of the term.
Review your home loan and compare the interest rate you’re paying with the rates on similar products. You may also want to consider added features such as an offset account. Offsets act as a savings account where any funds you deposit offset the interest you pay on your mortgage.
In fact, try and get a home loan health check at least once a year to ensure you’re still in the right product for your needs.
Ensure you are paying off both the principal and the interest repayments on your debt as interest only repayments will not reduce the principal loan amount.
Make it a priority to check how much you’ve paid off your mortgage each time you make a repayment. While it can be overwhelming to see a large debt in your bank account, regular monitoring of your debt reduction will help you stay on course. Overtime, you will see your debt reduce and you will be empowered to know you are on track.
2. Make additional repayments
Revise your budget at least once a quarter, if you spot any expenses you can forgo consider putting those funds towards your mortgage. Similarly, if you receive a pay rise, bonus, or tax refund, put the money towards your home loan.
Increasing the frequency of your repayments can help you save. Consider switching from monthly repayments to fortnightly. There are 26 fortnights in a year, so paying half your monthly repayment every two weeks instead of monthly, means you can make the equivalent of an extra month’s repayment per calendar year.
History shows us that low interest rates don’t last forever so try and put a buffer in place for interest rate rises. Ask yourself, how much an interest rate rise of 2 or 3% could affect your cash flow? Use the current low rate environment to your advantage and get ahead on your repayments.
However, if interest rates do fall, you should keep your repayments the same so you pay down more of the principal loan amount.
3. Fix part of your mortgage
Low interest rates could be an opportunity to fix a portion of your home loan. Keep in mind that some lenders may not allow you to make extra repayments on a fixed rate home loan.
We have a number of online calculators to help you determine how much you could save with these strategies. Click here to access them.
If you’re determined pay off your mortgage faster, you will need to be disciplined and be prepared to make sacrifices. While it might seem like a long road ahead, achieving your goal will be incredibly rewarding.
If you’d like to know how you could pay off your home loan sooner, speak to your local Mortgage Choice broker.