Paying off your mortgage early can be a great investment. Not only do you get the banks off your back but it frees up cash to be put towards other investments and most importantly it saves you thousands of dollars in interest. Most people don’t know this but if you let your mortgage run for the full 30 years you will end up paying the banks almost as much in interest as it cost you to buy the house in the first place!!! You can see why the banks make so much money!!!
In a nutshell, paying off your mortgage quickly is not rocket science, there are only two things you need to do. Firstly, you need to find the cheapest home loan you can. Then you need to make as many extra repayments as you can, as quickly as you can. This two pronged approach means not only is it important to have a mortgage with a low interest rate it is also important to make sure you have the right features as well.
Finding The Cheapest Home Loan
Like everything, the best way to find the cheapest home loan is to shop around. Comparison sites like Canstar and Money Buddy can give you a good start to find out what is out there. Speaking to a mortgage broker also might be useful.
The key to finding the cheapest home loan is that it is not just about finding the cheapest interest rate, you need to take into account the fees and charges associated with the loan as well. This is why you should look at the comparison rate as well as the interest rate. The comparison rate reflects the actual cost of the loan as it takes into account all the fees and charges as well as the interest payment that you will have to make over the entire life of the loan. It is rare that the advertised rate and the comparison rate are the same. So you should look at both, but put more emphasis on the comparison rate as it includes the fees and charges. There is no point in having a low interest rate if you are getting pinged on fees left, right and centre! (To find out more about the comparison rate and how it works please click here).
What Are The Best Features To Help Pay Off My Home Loan Quickly?
There are 3 features you should look for in a home loan to help you pay it off quickly:
(1) Unlimited extra repayments without restrictions or fees.
(2) Redraw facility – gives you the freedom to access your extra repayments, when life throws you a curve ball and you need access to the money. Watch out for any fees that may be involved on redraws.
(3) 100% offset account – this account allows you to reduce the amount of interest you pay on your loan by placing money in a savings account linked to that loan. Make sure it is an 100% offset account to maximise the benefit. I will explain how this works below.
If you already have an existing loan and want to switch to another loan you should always make very sure that benefits of the switch stack up even after taking into account any fees and charges you might incur for exiting your current loan. We all know the banks love to sting you with a fee or two when they can, so do your numbers and be doubly sure you are doing the right thing. Sometimes a better way is to shop around for the deal that suits you best, then ask your current bank to match it in terms of interest rate and features. Growth in the mortgage market has slowed, so the banks seem more willing to compete and price match in the mortgage market, so this approach is definitely worth a try. Like my mother always tells me “if you don’t ask you don’t get”!
Strategies For Making Extra Repayments
The power of making extra repayments is huge. Each extra repayment you make reduces the capital value (principal) of the loan which means that over time you will be paying interest on a smaller amount. That means your interest bill is growing at a smaller rate and again each repayment knocks off more principal. In money terms, just an extra repayment of $100 per month (roughly $25 per week) on an average $400,000 mortgage will cut close to $42,000 off your total interest bill and nearly 3 years off your home loan (using an interest rate of 5%). Extra repayments can also give you a buffer when, inevitably, interest rates start to rise again.
So here are some great strategies to make extra repayments:
(1) Move to fortnightly repayments. This takes advantage of the fact that there are 52 weeks in the year and 12 months. Fortnightly repayments mean you have made 26 repayments at half monthly repayment rate, or 13 full monthly payments by the end of the year. The trap with this one is to make sure that you divide your monthly repayment in half and pay that amount. Some banks get the total yearly interest on your loan and divide by 26, which means that you would pay the same interest for the year regardless of moving to fortnightly repayments. Complicated! I agree!
(2) When the Reserve Bank lowers rates you keep your repayments the same. This is a great idea if you are living comfortably with your current level of repayments. This strategy has the added bonus that when interest rates eventually start to rise, it won’t be a problem for you as you have already been paying a higher rate anyway.
(3) Round up your repayments to a round number. An extra $6 per month for example, can cut 2 mortgage repayments off the life of your loan.
(4) Utilise any lump sum payments you might get as an extra home loan repayment. Tax refunds, dividends from shares and any work bonuses can make excellent extra repayments.
(5) Ignore the honeymoon rate. Some home loans give you a honeymoon rate for a period. If you ignore this and make repayments at your long term interest rate, it puts you ahead in terms of repayments and means that you won’t be shocked when the honeymoon period ends and your interest rate rises to the ongoing rate.
How To Use A 100% Offset Account To Pay Off Your Mortgage
Now I have to admit this is one of my most favourite strategies to pay off your mortgage and it is the one my husband and I have used to banish our mortgage. I am constantly surprised at how many people don’t understand how an offset account works and how they can use it to pay down their mortgage quickly. Click here to see part 2 of this post, on how to use an offset account to pay of your mortgage. Or here to learn about the factors you should consider when thinking about fixing your mortgage.
If you liked this post you might also like:
* Please note this is for your general information only and does not constitute financial advice. Please see a financial planner or accountant to get advice specific to your individual needs