For many Australians, a home loan is one of the largest financial commitments they’ll make in their lifetime. While a typical home loan might take 25 to 30 years to pay off, there are several strategies you can use to reduce the term of your mortgage and save thousands in interest. Paying off your home loan faster not only provides financial freedom sooner but also cuts down on the amount of interest you’ll pay over the life of the loan.
If you’re looking to become mortgage-free sooner, here are some effective strategies to help you pay off your home loan faster and save on interest.
1. Make Extra Repayments
One of the most straightforward ways to pay off your home loan faster is by making extra repayments. Most home loans allow you to make additional payments beyond your scheduled repayments. Any extra amount you pay goes directly toward reducing the principal balance of your loan, which reduces the total interest you’ll pay.
How it works:
- Small amounts add up: Even making small extra payments, like $50 or $100 a month, can significantly reduce your loan term and save you thousands in interest over time.
- Lump-sum payments: If you receive a bonus, tax refund, or inheritance, consider putting that lump sum toward your mortgage. It can make a big dent in your principal balance and shorten the loan term.
Before making extra repayments, check whether your loan has any restrictions or fees for doing so, especially if you’re on a fixed-rate loan.
2. Switch to Fortnightly Repayments
Instead of making monthly repayments, consider switching to fortnightly repayments. By doing this, you effectively make one extra repayment each year, which can help you pay off your home loan faster.
How it works:
- Most lenders calculate monthly repayments based on 12 months, but by splitting your monthly repayment into two fortnightly payments, you’ll end up making the equivalent of 13 monthly repayments in a year.
- For example, if your monthly repayment is $2,000, switching to fortnightly payments of $1,000 means you’ll pay an extra $2,000 (one full month) each year, reducing your loan term.
This small change can save you years on your mortgage and help reduce the total interest you pay.
3. Use an Offset Account
An offset account (available on the First Option Complete Package Home Loan) is a transaction account linked to your home loan. The balance in your offset account reduces the amount of your loan that you’re charged interest on. For example, if you have a $400,000 home loan and $50,000 in your offset account, you’ll only be charged interest on $350,000.
Benefits of an offset account:
- Interest savings: The higher the balance in your offset account, the less interest you’ll pay on your loan. Over time, this can save you thousands of dollars.
- Accessibility: Unlike making extra repayments directly to your loan, the money in your offset account is still accessible if you need it. You can use it like a regular transaction account, but it’s working to reduce your mortgage interest.
To maximise the benefits of an offset account, try to keep as much money as possible in it by directing your salary, savings, and other income into the account.
4. Refinance to First Option for a Lower Interest Rate
Refinancing your home loan can be a powerful way to reduce your interest payments and pay off your mortgage faster. By securing a loan with a lower interest rate, more of your regular repayments will go toward paying down the principal rather than covering interest.
How it works:
- Compare different lenders: Even a small reduction in your interest rate can result in significant savings over the life of your loan. For example, reducing your interest rate from 7.04% to 5.99% on a $500,000 loan can save you thousands in interest each year.
- Consider switching loan types: If you’re currently on a fixed-rate loan, switching to a variable-rate loan might allow you to benefit from rate cuts. On the other hand, if rates are rising, locking in a lower fixed rate could save you from future rate hikes.
Before refinancing, it’s important to consider any fees or break costs that may apply. Ensure the savings from a lower interest rate outweigh any upfront costs.
5. Make Use of a Redraw Facility
Some home loans come with a redraw facility, which allows you to withdraw any extra repayments you’ve made if you need access to the funds. While it works similarly to an offset account, the redraw facility can be useful for homeowners who want to make extra repayments but still have the option to access the money if necessary.
How it works:
- You can make extra repayments toward your loan, reducing your loan balance and the interest charged.
- If an unexpected expense arises, you can redraw those extra repayments to cover the cost. However, any money withdrawn from the redraw facility will be added back to your loan balance, increasing the interest charged again.
If you have a redraw facility, use it wisely—only withdraw money if absolutely necessary to keep your loan balance as low as possible.
6. Pay More Than the Minimum
Whenever possible, pay more than the required minimum repayment amount. Many homeowners stick to the minimum repayment, but by paying even slightly more, you can speed up the process of reducing your loan balance and paying less interest.
How it works:
- For example, if your minimum repayment is $1,800 per month, consider paying $2,000 instead. The extra $200 will directly reduce your loan principal, saving you on interest.
- Over time, this strategy can cut years off your mortgage and save you tens of thousands of dollars in interest.
7. Avoid Interest-Only Loans
While interest-only loans can seem attractive due to lower initial repayments, they don’t help you build equity in your home or reduce the principal balance. During the interest-only period (typically 5 years), you’ll only be paying off the interest, meaning the loan balance stays the same.
Once the interest-only period ends, your repayments will increase as you start repaying both the principal and interest, often leading to higher costs in the long term. If you’re serious about paying off your home loan faster, consider avoiding interest-only loans or switching to principal-and-interest repayments.
8. Round Up Your Repayments
A simple but effective strategy to pay off your loan faster is to round up your repayments. By rounding up to the nearest $50 or $100, you’ll pay a little extra each time without significantly impacting your budget.
How it works:
- If your minimum repayment is $1,740, round it up to $1,800 or $1,850. That extra $60 or $110 might not seem like much, but over time, it can make a big difference in reducing your loan balance and saving on interest.
9. Make Your Mortgage a Priority
Finally, one of the most effective ways to pay off your home loan faster is to make it a financial priority. By committing to paying down your mortgage early and being disciplined with your budget, you can free yourself from debt sooner.
How to make it a priority:
- Budget for extra repayments: Create a household budget that prioritises extra mortgage repayments, even if it means cutting back on discretionary spending.
- Avoid taking on new debt: Try to avoid taking on new loans or credit card debt, which can divert funds away from your mortgage.
- Review your financial situation regularly: Periodically review your loan terms, interest rate, and repayment strategy to ensure you’re on track to pay off your home loan as efficiently as possible.
Save Thousands in Interest by Paying Off Your Loan Sooner
Paying off your home loan faster can save you thousands of dollars in interest and give you the financial freedom to reach your other goals sooner. Whether you make extra repayments, switch to fortnightly payments, or take advantage of features like offset accounts, there are several ways to reduce your loan term and cut down on the amount of interest you’ll pay.
By adopting these strategies and making your mortgage a priority, you’ll be well on your way to becoming debt-free and enjoying the benefits of owning your home outright.