Taking out a home loan is a huge commitment. It means that you owe hundreds of thousands of dollars to a lender, which will usually take decades to repay.
But what if we told you that there are some things you can do to speed up the process?
Here are our 20 tips for repaying your mortgage faster.
Tip #1 – Check Your loanScore
If you want to know how good your home loan really is, put it to the test by checking your loanScore. It’s quick, easy and best of all FREE. All you need to do is pop in some details about your home loan and in two minutes you will know if you could be saving money. Then you can be better informed if you want to go back to your lender for a chat, or you can give one of our team of expert brokers a call and we can take action on your behalf.
Tip #2 – Choose the Right Loan
Before you can think about faster repayment, you should have the right home loan product for you and your circumstances. Consider the features that are most important to you. For example, you may prefer an offset account to a redraw facility.
Most importantly, committing to a long-term fixed rate loan can hinder your ability to pay down the loan quickly. Many lenders add break fees and exit costs into the equation if you try to repay such loans faster than anticipated. Opting for a variable rate home loan so you can make extra repayments might be your best bet.
Tip #3 – Avoid Interest Only Repayments
Many lenders offer you the chance to pay just the interest on their home loan products. This leads to lower monthly bills, but there’s a catch. If you only pay the interest, you don’t put any dents into the loan principal.
It’s the principal that you need to repay if you’re going to get your loan cleared. Making sure you get a principal and interest (P&I) loan allows you to start repaying the principal straight away. Any extra repayments you can make in the early years will also lessen the effects of compound interest.
Tip #4 – Pretend Your Loan Has a Higher Interest Rate
Let’s assume that your loan comes with an interest rate of 4%. If you make the standard repayments, the loan will probably last for between 20 and 30 years.
Why not apply your own rate to the loan? If you’re at 4%, act as if the loan had a rate of 5% or 6%. These extra “interest payments” don’t go to the interest at all. Instead, they’ll reduce the loan principal. As a result, you can repay the loan faster, plus you won’t be in for a shock if the variable rate moves up.
Tip #5 – Consider a 100% Offset Account
Some lenders offer a 100% offset account feature with their home loans. This means that every source of your income goes into your mortgage account. You can draw from the account to pay for life’s expenses, in addition to your mortgage repayments.
There’s a constant seesaw effect with this type of loan. You’ll reduce the interest payable against your principal when you get paid, then increase it again with your withdrawals. If you manage your finances correctly, you can ensure your withdrawals don’t exceed the amount you pay towards your mortgage. In essence, you make extra repayments whenever you get paid and manage to not spend all of the money outside of the standard mortgage payment on something else. It’s possible to make massive savings using this technique.
Tip #6 – Avoid Life’s Luxuries
Take a moment to think about all the things you spend money on that you don’t really need. That morning coffee or bought lunch may seem like a tiny expenditure, but this money really adds up over time.
Take stock of what you spend money on and think about where you could make cuts. Avoiding life’s little luxuries could save you hundreds of dollars that you can put toward your home loan. Of course, you don’t have to live a Spartan existence either. Just try to avoid repeatedly spending money on things you don’t need.
Tip #7 – Change Your Lender
Lenders’ products change all the time, which means a loan that was great five years ago may not be the best you can get now. Switching lenders so you can access lower interest rates seems like a simple tip, but many people don’t do it because of the hassle involved.
Speak to a home loan consultant to find out if there are any products available that can save you money. Furthermore, figure out what, if any, fees you’d have to pay to get out of your current mortgage. If all the numbers add up, why not make the switch? You could pay off your principal faster with the money you save on interest payments if you do.
Tip #8 – Try Investing
You may find that you have a fair amount of money left over after making your monthly mortgage repayment. Putting this towards your mortgage will speed things up, but you might make things go faster by investing.
This is a risky option, so you should always speak to a professional first. However, if you can successfully invest in shares, you stand to generate a sizeable income. This might even allow you to pay off a large portion of your mortgage in one go.
Tip #9 – Use Your Equity
Over time, you will build equity in your property. Equity is the difference between your home’s value and the amount of your home loan you have left to repay. For example, if you have $200,000 left to repay on a $600,000 loan, you have $400,000 in equity. Many lenders allow you to access up to 80% of this equity for use with other purchases. This may prove useful if you want to make a large purchase that would otherwise require a personal loan.
Your equity loan will usually carry the same interest rate as your home loan. This is often much less than the interest rate on a personal loan. As a result, you could use your equity to make the purchase, then use the money saved in interest payments to make extra repayments on your home loan. It takes careful management, but an equity loan can leave more money in your pocket that you can put toward your mortgage.
Tip #10 – Don’t Set and Forget
A lot of people slip into a comfort zone with their mortgage. They just keep paying what the lender expects of them, without keeping an eye on the industry.
Lenders offer different deals at various times of the year. With the right timing, you could switch your mortgage and take advantage of an array of discounts that allow you to repay your home loan faster.
Tip #11 – Use an Offset Account
We’ve already mentioned 100% offset accounts, but standard offset accounts may be a simpler option. With an offset account, you can put a large amount of money into an account, which offsets the interest calculated on the loan’s principal.
This effectively reduces the amount of interest you pay. If you add this saved interest into the offset account, you put an even bigger dent in your loan’s principal. This works best if you have a large sum of money to put into the offset account from the beginning of the loan period.
Tip #12 – Pay the First Instalment Early
Even baby steps can help when you’re trying to repay your home loan faster. Start from the initial repayment. Instead of waiting a month, which is what most lenders ask, you could make the first repayment on the day of settlement.
As a result, what would have been your first repayment becomes your second repayment, and so on. Even if you do nothing else, you’ll always be a month ahead.
Tip #13 – Split Your Repayments
A lot of people make monthly repayments on their mortgages. This keeps things simple, but it also slows you down. Instead, split your payments so you make half of the monthly repayment every two weeks.
You may be wondering how this helps. Think of it like this. A monthly repayment schedule means you make 12 repayments per year. A fortnightly schedule means you make 26 repayments, each at half of what your monthly repayments were. As a result, you make one extra full repayment each year.
Tip #14 – Get a Combination or Split Loan
With a combination loan, you essentially create two or more mortgage accounts. As an example, one can be on a fixed rate, whereas the other one is on the lender’s standard variable rate. You can then make extra repayments on the variable loan.
How can this help you repay your loan faster? It all comes down to careful management. If you make extra contributions to the variable rate loan while maintaining consistent repayments to the fixed rate loan, this allows you to reduce the principal of the variable one quicker than trying to make extra repayments on the total loan amount. From there, you just repeat the process.
Another benefit is you can take advantage of any drop in interest rate while also helping protect yourself against a rise in rates. This approach is made even more effective if you’re able to attach an offset account to the variable portion of the loan.
Tip #15 – Get a Package Deal
Many lenders offer package deals with their home loan products. Packages give you access to credit cards and other facilities like insurance products at discounted rates.
You can put the money you save on these discounted products towards extra repayments on your home loan. Furthermore, you may be able to access a professional package for any loan that exceeds $150,000. These packages offer discounts on the lender’s products that may help you to repay your loan faster.
Tip #16 – Don’t Capitalise Other Charges
Your mortgage may come with additional fees. You might have to pay application fees, plus you’ll have to deal with Lender’s Mortgage Insurance (LMI) if you borrow over 80% of your home’s value.
Many lenders allow you to capitalise these payments onto your mortgage. This may seem attractive, as it means you don’t have to pay as much upfront. However, it adds money onto the loan’s principal, so you’ll spend longer repaying it. Try to pay all fees upfront if you want to pay off your loan faster.
Tip #17 – Don’t Use Bridging Finance
A lot of people move home at least once in their lifetimes. If you decide to buy a new home before selling your old one, you can create a lot of financial problems for yourself. Many lenders offer bridging finance to help you during this gap between buying and selling. However, taking this finance will slow down your loan repayments. You’ll essentially repay an extra home loan during the bridging period, plus, you’ll have to deal with a higher interest rate. This is all money that could have gone towards a single loan.
As such, it may be best to sell first and buy later if you want to repay your loan as fast as possible. Alternatively, you could use a deposit bond. This involves having a third party pay for the deposit on your new home, which you’ll repay when you sell your old one. You’ll pay a fee on top of the deposit for the service, but this is often lower than the extra repayments you make with bridging finance.
Tip #18 – Don’t Avoid Small Lenders
A lot of borrowers avoid small lenders. This may be because they only trust banks and large lenders due to the security they offer. After all, such lenders are less likely to encounter financial difficulties.
However, that doesn’t mean you should discount small lenders entirely. In fact, many of them are in a strong financial position because they manage themselves properly. Furthermore, most small lenders often offer lower interest rates, which means you can repay your home loan faster.
Tip #19 – Be Wary of Honeymoon Periods
Many lenders use introductory rates to tempt borrowers to their products. These “honeymoon periods” may be great at first, but lenders will make their money back somehow. Often, they’ll use a higher interest rate than normal for the rest of your home loan’s life. Furthermore, you may have to deal with high break fees and exit costs if you decide to refinance within the first three years.
Always look at how interest rates change later on. You may find that attractive initial rate balloons after a couple of years, which will slow down your repayments in the long run.
Tip #20 – Consolidate Personal Debts
At first, the idea of adding your personal debts onto your home loan seems counterproductive. After all, you’re basically creating a higher principal, which means it will take longer to repay the loan.
But think about it like this. If Australia’s interest rate rises, you can feel certain that lenders will increase their own rates. This will eat into any money that you had earmarked for extra repayments on your mortgage. Usually, lenders offer lower interest rates on their mortgages than they do on their personal loan products. As a result, consolidating your personal loans onto your mortgage means you pay a lower interest rate, so you have more money to make extra repayments.
What to Do Next
So there you have it, our top 20 tips for speeding up your mortgage repayments. You may not be able to use them all, but at least a few should prove useful apply to your situation. Before putting this information into practice, you should do the following:
- Find out if you can save money through refinancing.
- Talk to one of our mortgage brokers about ways to repay your loan faster.
This information is general in nature, and you should always seek professional advice when making financial decisions.Photo Credit: Background photo created by schantalao