Tips to pay off a mortgage faster

While there is a lot of advertising that claims to help you pay off your mortgage faster, it probably comes as no surprise to hear that you only have four ways to reduce the cost of your home loan (and time frame):

1. Get a cheaper interest rate
2. Make more frequent repayments
3. Repayments that are larger than the required amount
4. Paying for only the home loan features that you need

Tip 1: Get a cheaper interest rate

Probably the single biggest opportunity to reduce your mortgage is to find a cheap interest rate from the start. Shop around with both major banks and other secure lenders such as credit unions and building societies. Remember, the benefits of a cheap interest rate may be nullified if you are saddled with high fees and an inflexible product. So do your homework and find out which mortgage product offers a cheap interest rate with lower fees and a combination of home loan features that you need – your mortgage broker can help you with this.

Tip 2: Get a loan with a flexible payment structure

If you plan to make extra repayments, make sure your mortgage allows you to make your regular payments plus any ad hoc repayments without penalty. Choose your features wisely because they will cost extra.

Tip 3: Make extra payments as early as possible

Most people don’t realise that the majority of the payments made at the beginning of a home loan actually go towards paying off interest and not reducing the principal of your mortgage.

Therefore any extra payments that you make from the very beginning, go towards reducing the principal on your and minimising interest payments down the track.

Tip 4: Make your first mortgage payment on settlement date

This is yet another excellent example of how making early payments can reduce the principal and future interest repayments on your mortgage.

Tip 5: Make more frequent repayments

Where interest is calculated on a daily basis, making payments on a more frequent basis whether fortnightly or weekly serves to cut down on the interest payments on your mortgage.

This means that you’ll be making 13 monthly repayments each year – reducing the principal and term of your loan.

Tip 6: Paying income directly into your home loan

As interest is calculated daily, getting your salary credited directly to your home loan account effectively reduces the principal you owe from the moment your salary is in the account, this is in turn reduces the interest.

Tip 7: Don’t lower repayments if interest rates drop

Your minimum mortgage repayments will usually fall if interest rates drop. Rather than reducing your payments at this stage, maintain your previous payment levels.

This particular method has an added benefit in that you will hardly notice the difference since you would already be used to making payments in that amount.

Tip 8: Match your fixed rate to your intended period of stay

If you intend to live in a property or sell it after a specific period, it makes sense to match your fixed home loan rate to this time frame. So if you intend to keep a property for five years, avoid getting a 10 year fixed interest rate.

Tip 9: Make your home loan portable

Most people don’t live in the same property for 30 years or more, that is why home loan portability is an essential feature. This allows you to sell one home and buy another without having to reset the loan – saving you the cost of set-up and exit fees.

Tip 10: Get an offset account

An offset account is essentially a separate savings account linked to your home loan account. The balance in this account is usually subtracted from the outstanding home loan principal. So if your balance is $20,000 and your home loan was originally $300,000, interest is only charged on $280,000.

Keep in mind some lenders require a minimum balance in these accounts. Consult your mortgage broker to ascertain other requirements from lenders.

Tip 11: Get your household budget in order

Most people (or couples) who earn more than $90,000 could save about $500 a month just by trimming little luxuries such as smoking, drinking or that extra cup of coffee during the day. Utilise your budget both before and during the life of your mortgage to ensure that you are in a position to meet your mortgage repayments comfortably.

Tip 12: Keep in touch with your mortgage broker

As there may be numerous changes in the home loan market and to your personal financial situation over the course of your home loan, it is wise to stay informed and consult your mortgage broker regularly.

Remember, some of these changes may be opportunities to own your home sooner!

By Extranoski