Home Mortgages How to Pay Off Your Mortgage Faster

How to Pay Off Your Mortgage Faster

written by Shelley Marsh 29/08/2013

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:

Home & Contents Insurance: How Do You Know If You Have Enough?

Should I Fix My Mortgage Rate?

How To Use An Offset Account To Pay Off Your Mortgage Faster

How To Make Your Savings Work Harder

* 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

You may also like

44 comments

Becc 30/08/2013 at 7:00 am

Looking forward to next weeks post as well.
I have taken most of these steps, but with a mortgage or two well over our heads, we realise it is time to bunker down and really get serious. Thank you for the timely advice 🙂

Reply
Lydia C. Lee 30/08/2013 at 7:02 am

Good tips. Hadn’t thought of the honeymoon one…

Reply
Wendy Parks 30/08/2013 at 9:11 am

We are making extra repayments and using our offset account and it’s working well. We recently considered fixing our loan at a really low rate for 2 years, but with no offset, and found out we would be worse off!
Really enjoying reading the tips on your blog. So valuable 🙂

Reply
Shelley Marsh 30/08/2013 at 8:46 pm

Hi Wendy, I am glad you find my posts helpful. Yes I will be writing a post on whether you should fix your rate in the next few weeks, you are right in some circumstances it doesn’t make sense at all to fix. Money Mummy

Reply
Jody at Six Little Hearts 30/08/2013 at 10:58 am

WOW! I had NO idea such a small monthly repayment could make such a huge difference over the life of a loan! I think we might start putting more in. Thanks for the valuable tips as always.

Reply
Shelley Marsh 30/08/2013 at 8:48 pm

Hi Jody, yes it is surprising that even small amounts can make a huge difference. Quite often we get trapped in the belief that you have to do big things to get your mortgage paid off but in reality it just takes small things to make a huge difference. Money Mummy

Reply
Leanne Winter 30/08/2013 at 12:25 pm

Thanks Shelley – I’d never really been clear on what the ‘comparison’ rate was all about. Good advice, as always.x

Reply
Shelley Marsh 30/08/2013 at 8:50 pm

Hi Leanne, I am glad I could clear it up for you. I think it is a concept that generally speaking the industry does not explain well because it is not in their best interests to do so 🙂 Money Mummy

Reply
Emily @ Have a laugh on me 30/08/2013 at 3:56 pm

Yes 100% offset is a fantastic idea. My hubby, used to be financial advisor, set up terms of our mortgage. We also put any money we have on it to help reduce the amount we have to pay off, but with 3 kids, we are just slow and steady at this stage! GREAT tips though 🙂

Reply
Shelley Marsh 30/08/2013 at 8:52 pm

Hi Emily – yes sad but true I am quite in love with my 100% offset, well as in love with a financial product as you can be :-). It is a strategy that has worked really well for us too, so that is why I am dedicating a whole post to it next week. Thanks Money Mummy

Reply
Claireyhewitt 30/08/2013 at 10:45 pm

Great tips – we do most of these already, but it still feels like we are never going to pay off this loan.

Reply
Shelley Marsh 02/09/2013 at 10:22 pm

Hi Claire, yes it often feels like an impossible task but you seem like you are making great strides towards the goal. If you want to see how well you are doing you should have a play with a repayment calculator which will show you how much you have already shaved off your loan. This should give you some numbers around how far you have already come. Money Mummy.

Reply
Kylez @ A Study in Contradictions 31/08/2013 at 4:18 pm

Continuing to pay the same repayment when your interest rate goes down is an excellent tip. We are currently paying extra on to our mortgage and has kept our repayments the same as what they were about three rate changes ago. While its not much it makes a difference and we can still live comfortably. We would be paying more but we are trying to pay off our credit card. We should be payin the extra from the mortgage on to the credit card but we want to get the mortgage a bit lower and have the little re-draw buffer hen needed (it came in handy when our hot water died a couple months ago an we were able to use some redraw rather than te credit card), plus we are hoping to refinance soon so tht the last of the credit card can actually go on to the mortgage.

Reply
Shelley Marsh 02/09/2013 at 10:19 pm

Well done Kylez, you seem to have a pretty good plan in place. Getting rid of your credit card debt is a huge achievement so congrats, you seem to be well on the way. Money Mummy

Reply
rah 02/09/2013 at 6:44 pm

LOVE these tips, we’re about to remortgage our place – thank you!!

Reply
Shelley Marsh 02/09/2013 at 10:10 pm

Hi Rah! No worries, I am glad you found them useful! Good luck with your refinancing. Money Mummy

Reply
Ness @ One Perfect Day 06/10/2013 at 12:28 am

These are such great tips, thank you. We are not in a position to be able to have an offset account right now, so it is really wonderful to read that there are still lots of things we can do to reduce the life of the loan. I lvoe that even small things like the extra $6 per payment can have a big impact.

Reply
Shelley Marsh 06/10/2013 at 6:49 pm

Hi Ness, absolutely small things can make big differences. That is the way to do it. Do a couple of small things consistently over a long time and watch the benefits add up.

Reply
Coscto Membership - is it worth it? 16/07/2014 at 5:35 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
How Much Your Credit Card Debt Is Really Costing You 17/07/2014 at 10:17 am

[…] How To Pay Off Your Mortgage Faster […]

Reply
How To Get The Best Deal On Your Health Insurance 24/07/2014 at 8:46 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
Does Shopping At Aldi Save You Money? 27/07/2014 at 9:32 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
Veggie Super Food Bowl – Family Meals On A Budget | Money Mummy 28/07/2014 at 6:36 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
How To Use An Offset Account to Pay Off Your Mortgage Faster 28/07/2014 at 8:30 pm

[…] For those who missed part one of this series on how to pay off your mortgage faster, please click here. […]

Reply
Winter Family Meals On A Budget 29/07/2014 at 8:35 pm

[…] How to pay off your mortgage faster […]

Reply
5 Ways To Avoid ATM Fees 07/08/2014 at 5:39 am

[…] How to pay off your mortgage faster […]

Reply
Choosing The Right Mortgage For You 07/08/2014 at 6:07 am

[…] How To Pay Off Your Mortgage Faster […]

Reply
Should I Fix My Mortgage Rate? 07/08/2014 at 6:08 am

[…] loan is not just about the interest rate but you also need to look at the comparison rate.  Click here to see that […]

Reply
10 Tips For Saving Money 07/08/2014 at 9:43 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
MoneySmart Week – Come And Join Me And Take Up A Free Money Challenge! 20/08/2014 at 2:03 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
Home And Contents Insurance: How Do You Know If You Have Enough? 03/09/2014 at 7:41 pm

[…] How to pay off your mortgage faster […]

Reply
Sort Out Your Superannuation 08/09/2014 at 6:47 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
5 Simple Savings Ideas 06/10/2014 at 7:17 pm

[…] How To Pay Off your Mortgage Faster […]

Reply
Christmas Club Savings Accounts - Are They Worth It? 20/11/2014 at 9:51 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
How I Saved $93 A Month In 15 Minutes! 08/01/2015 at 9:29 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
How To Save Money On A Holiday To The USA! 30/03/2015 at 5:52 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
What should you do with your mortgage rate cut? 07/05/2015 at 2:46 pm

[…] How to Pay Off Your Mortgage Faster […]

Reply
Pocket Money And My MamaMia Outloud Apearance!!! 10/05/2015 at 11:19 am

[…] How To Pay Off Your Mortgage Faster […]

Reply
From Little Things Big Things Grow 30/01/2016 at 8:34 pm

[…] How To Pay Off your Mortgage Faster […]

Reply
Lyn 23/10/2016 at 12:41 pm

Hi , I will receive my $450.000 at the age of 60 years old. My mortgage i owe us $285.00 and credit card is $40.000. What i shall I do to make my left over money. Shall I pay the whole mortgage and credit card? I will come back to work on casual work as a nurse. Please help would be very much appreciated. Thank you.
LYN

Reply
Lyn 23/10/2016 at 12:43 pm

Hi , I will receive my $450.000 at the age of 60 years old. My mortgage i owe is $285.00 and credit card is $40.000. What i shall I do to make my left over money. Shall I pay the whole mortgage and credit card? I will come back to work on casual work as a nurse. Please help would be very much appreciated. Thank you.
LYN

Reply
Win Free Stuff! 19/10/2017 at 12:42 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
Reduce Your Average Electricity Bill 19/10/2017 at 12:49 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply
Talking To Your Children About Money 19/10/2017 at 1:00 pm

[…] How To Pay Off Your Mortgage Faster […]

Reply

Leave a Comment