10 Tips to Pay off Mortgage Faster in Australia (#3 is my favourite)

One of the most significant debts most people have in their life are mortgage loans, and I wanted to share ten tips to help you shave off at least seven years off your mortgage loan just by maintaining your existing repayments to your loan. Yes, you can quickly look up Extra Mortgage Repayment calculators online and figure it out. 

Reference: Canstar Mortgage repayment calculator

Here are some other tips which will make the process even faster. Check out the strategies you might find interesting to consider.

• 1. Choosing the right type of loan
• 2. Avoid interest only repayments
• 3. Behave like your interest rate is much higher.
• 4. Use a 100% offset account
• 5.Prioritise your budgeting
• 6. Check out the competition
• 7. Invest your money
• 8. Repay your loan more frequently
• 9. Pay off Bank fees immediately
• 10. Try the non-bank lenders

Choosing the Right Type of Mortgage Loan

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Getting the wrong type of loan is like buying a house like this!

Here's the thing, before you can think about paying off your home loan faster, you must have a type of home loan that allows for additional repayments.

The two types of loan you can get right are fixed-rate and variable-rate mortgage, which allows only maximum additional payments of $10,000 per annum. This can be a big problem.

If you have already committed to a long-term fixed-rate, it may have hampered your ability to make additional repayments on your loan.

Fortunately, there is a solution to this issue: To split the rate for your home loan.

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You can get the best of both worlds by splitting your home loan into where you can get a part of your loan variable to get the flexibility to make additional repayments and the fixed-loan to get the certainty in your payments. The above image is an example of $500,000 loan split of 50/50 fixed and variable.

Follow this process to get this done.

1. Based on your financial situation, figure out how you would like to divide your mortgage loan (50/50, 70/30, 80/20, etc.)

2. Call you bank and let them know how you want to split the loan.

3. Confirm with your bank that your mortgage account is correctly connected to the variable division

2. Avoid interest-only repayments

By completing this payment, you can save heaps of money and time off your mortgage loan.

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Some lenders will offer you an interest-only loan to give an illusion of lower monthly repayments. Still, the catch is you will end up paying tens of thousands of dollars by the end of your mortgage loan since you will start paying back the principal after a long time.

Paying principal and interest ensures that you can repay your loan, reducing the effects of compounding interest and repaying your loan much faster.

As Albert Einstein once said, compound interest is the eighth wonder of the world. "The one who understands it, earns it, the one who doesn't pay it". Many people underestimate the power of compounding. 

3. Behave like your interest rate is much higher.

This is my ideal strategy if you can shift your mindset to this method.

This unique strategy can help you pay off your home loan ten years faster:

First, find out what your mortgage loan payments would be if interest rates doubled to 8% (the long-term average standard variable rate).

Using the ASIC payment calculator, calculate what your payments would be if the interest rates were 6%. ( Double of today's average interest)

For a 500,000 loan, you are looking at a monthly payment of $3, 232 per month instead of $2,381 per month.

That's an additional $1300 per month.

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This higher repayment would save over nine years on the term of my loan and would reduce interest costs by approx. $ 80,000

Yes, that is a lot of money.

The benefit of this method is if interest rates rise in the future, you won't get caught because you are already making additional payments!

4. Use a 100% Offset Account

It's no secret that 100% cleared accounts are the best way to pay off your home loan faster.

Every dollar in the clearing account is reducing the balance on your home loan.

Your pay, gifts, bonuses, tax refunds.

Using a clearing account can help you pay for your home much faster.

That being said, there are still plenty of people who don't fully take advantage of a 100% clearing account.

As you can see from the image below, each dollar in compensation reduces the amount of interest paid on your home loan.

5. Prioritise your Budgeting

There are so many apps available now to track your spending these days like PocketBook or YNAB . It's just a matter being aware of making it a habit.

Make it a habit to track and be aware of your spending pattern.

These apps will let you connect to your bank account and let you track the spending and give you reports, so it's easy for you to be aware.

6. Check out the competition

Other banks may reduce their interest costs in THOUSANDS.

(In fact, a survey found that after refinancing there was an average savings of $ 90 per month). Research and call different banks and brokers to what offers are available and speak to your existing bank to see if they can match the rate or lower the rate. This method works very well, and even 0.5 % off your home loan rate can reduce your loan repayment time by almost four years.

7. Invest your money

If you believe you have paid more than 30% of your loan, then it might be a good idea to look for avenues to invest which will give you a higher return than your existing mortgage loan.

There is some risk attached to this strategy, and it might be best to speak to a Financial Planner first before you make a move.

There is also an option called Rentvesting, which is buying a place where you want to live and renting a place where you can afford to live now.

The other option would be looking at investments such as stock market, ETFs, Precious metals, Cryptocurrencies etc.

8. Repay your loan more frequently

Instead of just paying more, divide your current monthly payment into two, and do it every fortnight.

For example:

Suppose your minimum monthly repayment is $ 1,000.

Cut this payment in half, $ 500, and make it every fortnight:

You end up making one additional repayment per month because there are 26 fortnights vs. 12 months!

And in one year pay off your loan with an additional monthly payment or an extra $ 1,000, and this minimal amount reduces four years and nine months of your loan

9. Pay off Bank fees immediately

Here is the truth:

If you want to get a mortgage loan, you will have to pay some bank fees.

Bank fees can add up to $ 500-600 per application.

• Loan Application / Settlement Fees: Some lenders charge on the initial reduction of your loan

• Fees Document Preparation Fees - Lenders may charge this to prepare their mortgage loan contracts before approval

• Fees Bank Valuation Fees: Generally do not apply, but if you need a valuation, they may charge you

• Other fees - Annual fees! - Deceptive annual fees can cost up to $ 400 per year.

With that said, the most expensive rate you can afford to get a loan is mortgage insurance (LMI) from lenders.

Lenders' mortgage insurance can be in thousands of thousands.

While it is not always possible to pay the mortgage insurance costs of lenders in advance, it is worth considering.

In the example above, $ 15,741 in mortgage insurance from lenders carried costs over 30 years.

Almost double the interest! 

10. Try out the non-bank lenders

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Small lenders are as safe as big banks. This is because of the Australian government deposit guarantee scheme.

The Australian government has guaranteed deposits of up to $ 250,000 in Authorised Depository Institutions (ADIs) such as your bank, construction company, or credit union. According to ASIC, your money is guaranteed if something happens to ADI, which means even if the smaller lenders offer significant discounts because they need to compete with the big banks. The benefit also the smaller lender will be able to offer a lower interest rate to you, which means you can pay off the loan faster.

Often, smaller lenders need to be more competitive than larger lenders to gain market share, and the benefit to you is that you could receive a lower interest rate. 

Did I miss anything?

What advice from today's post are you going to try first?

Or maybe I didn't mention one of your favourite tips for paying off your home loan faster? I would love to read your thoughts by leaving a comment below.

This article was written for Finance Local Australia - Online Directory for Accountants, Financial Planners, Mortgage Lenders.

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