Most home loans are set up for a period of 25 to 30 years, but that doesn’t necessarily mean you have to be stuck in debt for your entire mortgage term. With smart financial planning it’s possible to pay off your mortgage early and own your home sooner.
Here are five tips for paying off your house sooner without spending a lot of extra money:
1. Switch to fortnightly repayments
If you’re comfortable shelling out cash every two weeks or so, switching to fortnightly or weekly repayments can help you settle your mortgage faster.
While there are 12 months in a year (resulting in 12 monthly repayments), there are 52 weeks or 26 fortnights. So, when you’re paying weekly or fortnightly, you’re effectively making an extra monthly repayment each year.
2. Make higher repayments
Chipping in a little extra than your minimum monthly repayment can help you pay off your debt sooner. For instance, if your lender reduces your variable interest rate, you’ll benefit from lower monthly repayments. But, suppose you continue with your original mortgage repayments despite the interest rate discount. You’ll end up paying extra money into your mortgage each month that will be directly applied towards reducing your mortgage principal.
Even if you can’t commit to a higher monthly repayment, regularly paying a bit more off your loan can help you close your mortgage sooner. For instance, paying $4 a day (the approximate price of a cappuccino) more into your loan could help you pay it off several months earlier. However, do check with your lender whether you’re required to pay any fees for making extra repayments and whether your expected savings justify the cost.
3. Consider using an offset account
An offset account is similar to a transaction account linked to your mortgage. You can deposit money into the account, and the balance will be offset against the amount owing on your home loan. For example, if you have $400,000 outstanding on your mortgage and $75,000 saved in your offset account, you’ll be charged interest as if you only owe $325,000 on your mortgage.
If you have sizeable savings, using an offset account can help you reduce the amount of interest you’re charged so that you can put more money towards paying down your mortgage faster.
However, it’s worth noting that an offset account facility may cost you more than a standard loan would. . Some lenders may charge a higher interest rate for a loan with additional features (like an offset account) than a basic home loan without any bells and whistles. Do consider the average balance you’re likely to keep in your offset account vis-à-vis the expected savings, and whether it justifies the extra fees you’ll pay for the feature.
4. Make lump-sum payments into your home loans
If you’re expecting a large tax refund or a sizeable bonus at work, it’s possible to use the extra cash to pay off your mortgage faster. Any lump-sum payment you make will come straight off your loan balance, reducing your debt substantially. For instance, a one-off lump sum payment of $5,000 (made in the fifth year) on a $300,000 loan with a 30-year term and 2.00 per cent p.a. interest rate can cut down 7 months from the loan term and save you over $3,000 in interest.
5. Consider downsizing
This is not really a tip to pay off your mortgage faster but one that might help you manage your finances better. Many of us dream of owning a large house. But if you find yourself falling behind on your mortgage repayments, it’s worth considering if you’re paying for a place that you don’t need. It’s possible that your house is too big for you and your family and you don’t require all the space you’re paying for. Downsizing to a smaller home may be a practical solution in this case. A smaller place will likely need a smaller mortgage, making it relatively easy to pay off the debt.
Besides getting the right-sized mortgage that you can comfortably afford, it’s also essential to choose a home loan with the right features that make it easier to manage your mortgage repayments in the long run. It’s also true that the best home loan for you today may no longer be the right choice five years down the line. Depending on your financial situation and goals, switching to another lender offering a lower interest rate or more useful features can help you save money and pay off your mortgage faster. However, be mindful of refinancing to a standard 30-year loan term that will increase the overall duration of your mortgage.
