As of December 2021, Australian owner-occupiers’ debt in Australia has grown to a whopping $1.3 trillion. And if you’ve got a home loan, you’re carrying some of that burden yourself. But there are some ingenious methods for you to tap into to help you pay off your home loan faster and shift that financial load off your shoulders.
So, whether you are a first homeowner, would like to increase your property equity or simply become mortgage-free as quickly as possible, we have a few tips to share on how to pay off your home loan faster.
How to Pay Off Your Home Loan Faster
Increase Your Repayment Amount or Frequency To Pay Off Your Home Loan Faster
A sure-fire way to pay off your home loan faster is to increase your repayment amount or its frequency. Making increased or additional repayments can not only reduce the life of your home loan, but can also give you a buffer against any interest rate rises in the meantime.
Increase your repayment amount to pay off your home loan faster
There are a few ways you can increase the amount of your regular repayments:
- Round up. Rounding up to the nearest $10 or $100, depending on what your budget allows. For example, if you pay $820 each fortnight and can increase this to $900, you will add over $2,000 to your home loan repayments in a year.
- Watch your interest rates. If interest rates drop, or you switch to a home loan with a lower interest rate, keep making repayments as though the rate was still higher.
- Focus on savings. Look at ways you can make incremental, regular savings in your daily spending habits. Calculate the overall amount and arrange to have that amount automatically paid into your home loan account. For example, cutting out one takeaway coffee each working day could add $1,000 to your home loan repayments in a year.
- Make annual increases. Much like getting into a cold lake one foot at a time, increasing your repayment amount each year takes the edge off while still allowing you to shave years off your home loan. Consider paying 2% more each year, which will only raise your weekly loan repayment by a nominal amount, but could have a good impact. For example, if your weekly loan repayment is $700, an additional 2% is only $14. But paying $14 more each week will add up to a $728 over the year.
Increase your repayment frequency to pay off your home loan faster
If you can increase the frequency of your mortgage repayments, you can make significant inroads into your home loan balance. For example, if you are currently making monthly repayments, see if you can switch to fortnightly repayments.
Use the 13-month repayment strategy to pay off your home loan faster
Another trick when asking how to pay off home loan faster is to use a simple math adjustment and aim for a 13-month year repayment cycle. With this strategy, rather than paying your home loan once a month, you’ll pay it every week. Simply divide your full monthly payment amount by four, and then pay this amount each week during the year. At the end of the year you will have paid 13 monthly repayments in the 12-month period, which can potentially have you paying off your home loan over three years early.
Make additional lump-sum payments to pay off your home loan faster
If you come into any additional income – a bonus at work, tax refund or a monetary birthday gift, for example – consider making an additional lump-sum payment to your home loan. Any additional payments you make will reduce the amount of interest you are paying and shorten the life of your loan.
Be sure to check with your lending institution as to whether there is a fee involved in making additional repayments.
An offset account is an account linked to your home loan. It operates like a savings or transaction account, offsetting its balance against the balance of your home loan. You will be charged interest, calculated daily, on the difference between the two.
If you deposit your regular and any additional income into an offset account, it can help to pay off your home loan more quickly and save you money over the life of the loan.
Be aware that offset accounts traditionally come with higher costs, so talk it through with your lending institution.
Refinance for a lower interest rate
Refinancing your existing home loan for one with a lower interest rate is another way for you to pay off your home loan faster. We’ve shared our top tips for refinancing, as it’s important that you are comparing interest rates on loans with similar terms and features.
Avoid interest-only loans
Interest-only loans can offer benefits for those that are struggling to come up with cashflow in the early days of their mortgage. But when you are trying to figure out how to pay off your home loan faster, it’s best to avoid them. You will successfully pay off your home loan faster if you are paying both the principal (the amount borrowed) and the interest.
The attraction of an interest-only loan for many is that the initial repayment amounts are smaller. Avoid the temptation though, as the interest-only period is usually only for the first five years. During that time, your repayments are only for the interest on the amount you borrowed, and you are not paying down this principal at all, so your debt remains.
At the end of the interest-free period, your loan will switch to principal-and-interest, at which time your repayment will be towards the amount borrowed and interest on that amount (which means higher repayments).
Speak to an Expert
Our single best advice when working out how to pay off your home loan faster, is to speak to an expert. At Lending Loop, our experts understand that every additional repayment amount can combine to make a huge difference to the life of your home loan.